Retirement planning: poor investment decisions are like bungee jumping without a rope

Freedom to make an investment choice comes with certain minimum requirements - a bit like remembering to attach a bungee rope before jumping off a bridge.

Giving individuals the opportunity to choose investment portfolios assumes that they have a good understanding of investment markets, compound interest, inflation and asset classes. A short presentation, culminating in a choice between conservative, moderate and aggressive portfolios, does not equate to a solid, secure grounding in finances.  Informed choice and emotional choice are not the same thing. 

The surest way to blow wealth is by making rash, short-sighted and emotional decisions. Allowing uninformed members to choose or change their own investment portfolios without appropriate guidance or counsel not only puts their own retirement at risk but it also could negatively impact on the entire fund. 

Martin Wagenaar, wealth management consultant at leading financial advisory business GTC, advises that investment choices "are often based on the members’ interpretation of risk. Risk in most of these members’ understanding equates to whether they would bungee jump or sky dive instead of simply hiking across the bridge or electing to remain in the plane until it lands". 

If someone is "conservative" and has never considered bungee jumping or skydiving – would it really be in their best interest to keep their money in cash for an extended period of time? I would suggest that this is an even bigger risk? 

"Let’s consider a retirement portfolio which is not effectively combatting the impact of inflation," says Wagenaar. "It is well known that there is a very close link between the inflation rate and the interest rate (not excluding the possible effect of tax on interest). If the portfolio in which you invest does not outperform inflation, it means your investment will not be growing in real (above inflation) terms and the likelihood of you not having enough money at retirement is high." 

Investment decisions need to be made with the end goal in sight, as this will talk to the required risk level. "Members who are given investment options should have very clear guidelines and should be aware of what their retirement goals are," said Wagenaar. 

Wagenaar says that in the long term this means that if one has a solid investment plan for retirement, one can make the required sacrifices up front in order to have sufficient investment capital at retirement.  He outlines a simple scenario to illustrate this point. 

“When thinking about retirement, there are many points to carefully consider, such as the individual’s ‘target’ retirement age, or what they’d like to earn as a ‘salary’ each month,” says Wagenaar.  “For example, if you’d like to retire in 40 years’ time and still earn at least 70% of your current salary once retired, it is then necessary to make some careful calculations to work out a strategy tailored to your exact needs, to ensure you reach retirement with all goals met.” 

Wagenaar explains that calculations need to take things like inflation and salary adjustments into account to make sure your investments reach your desired income level. In addition, the calculations need to factor in the total number of years an individual is expecting to earn such a monthly income, during retirement. 

“If you’re planning to retire at 65 and you are expected to live until you are approximately 85 equates to at least 20 years of income which needs to be provided for in total, and even these 20 years’ worth of retirement income need to include an inflationary increase for each year,” he continues. 

Calculating an individual’s growth rate which needs to be achieved and maintained each year to ensure that the desired income level is reached is paramount to reaching real security at retirement. 

Wagenaar warns that if investment portfolios do not meet required growth levels over time it will result in individuals having to make lump sum savings injections into their funds, or – even worse – they will need to accept that there will be less money to live on at retirement. 

“Big decisions about one’s retirement cannot be made with incorrect information or unrealistic expectations.  Just a small error could have a detrimental effect on the final outcome,” he says. "It really is vital for individuals to consult with qualified financial advisors who can guide them with their retirement plans. Wealth and retirement fund consultants can assist with these calculations and guide members’ funds into the appropriate portfolios. 

“Stress-free retirement is only possible if you’ve planned ahead, by starting to save carefully and diligently early in your life in preparation for what lies ahead in your 60’s and for a good few decades thereafter.”