The five questions investors should ask when planning for retirement

With the theme ‘Saving for the goal – The Path to Recovery’, this year’s July National Savings Month focuses on the importance of long term planning. However, many South Africans planning for their retirement are unaware that they could be losing as much as 60% of their total retirement returns, over an investment period of forty years.

This is according to Steven Nathan, Chief Executive of 10X Investments, who says that often the complexities of the retirement industry prevent investors from maximising their retirement savings. “Part of the reason for this situation is the retirement industry itself, which often follows practices that are not optimal in helping South Africans achieve their retirement savings goals.”

He points out that in order to begin saving for retirement, you need to clearly quantify your goal. “An investor needs to understand how big of a pot of money is needed to be set aside in order to ensure a comfortable retirement. A good place to start is to work towards a minimum replacement of 60% of your final salary, or around 10 times your current annual salary.”

Nathan says that there are five fundamental questions that investors need to ask themselves when planning for their retirement:

1. How much do I need to save for my retirement?

In order to achieve a comfortable level of retirement, investors should ideally save 15% of their salary – starting from their first pay check to their last i.e. a period of 40 years.

“For those who have started saving later in life, it is recommended that their retirement contributions are increased,” adds Nathan. “It is equally important to be educated on the various components of retirement saving in order to avoid the common mistakes that many South Africans make, such as paying high fees.”

2. How do the investment fees impact my retirement returns?

Do you know how much you are paying away in fees – for advice, administration and investment management - every year and how much this adds up to over thirty or forty years, after you include the additional return you could have earned on those savings?

The ugly truth is that paying total fees above 1% pa of your investment balance greatly diminishes the likelihood you will achieve your retirement goal. There is always a cost to investing, but you need to keep it as low as possible. You should always ensure that you are paying low fees, certainly no more than 1.5% and preferably below 1%. Why? If you can save 1% in fees, your final pension amount would increase by about 30%.

A recent National Treasury study found that if consumers could reduce their fees from 2.5% to 0.5% then they would be able to double their final pension or save half the amount to achieve the same pension.

3. Have I made the right choice?

Choice is not always a good thing. The retirement industry today offers thousands, if not tens of thousands, of investment products. And with each new fund launched, the choice grows – and so do the chances of making the wrong decision.

Nathan says that it is important to look for an investment solution, in which your investment is linked to your time horizon. Investors should own a High Equity Balanced Fund until they have less than five years to retirement. At this time, they should reduce the equity weighting each year in favour of defensive investments such as cash and bonds. This can automatically be achieved using life-stage portfolios. However, if they intend on investing in a living annuity at retirement, they still have a long-term investment horizon and should not necessarily change their investments.

4. Is my retirement investment product simple and transparent?

The reality is that the retirement industry is incredibly complex and it can become tricky choosing the right retirement product. However, it is possible for this to be simpler.

Nathan says that simplicity is critical. A standardised, simple product not only improves investors’ understanding of their fund, it is also more cost effective.

Knowing what you have increases the value of what you have. Knowing what you pay away in costs and how this impacts on your eventual retirement benefit, is even more important. For many years, investors never fully understood their benefits and the retirement industry (administrators, asset managers, consultants and life assurers) disclosed the bare minimum, in terms of fees and charges.

Nathan says that it is incredibly important that all fees and details related to your retirement investment are easily accessible and transparent. “Investors shouldn’t have to be afraid of having to ask their fund manager about any costs that could potentially be reducing their retirement returns.”

5. Is my retirement fund manager under-performing the market?

No matter how smart a retirement fund manager might be, they only have a 20% chance of beating the index when actively managing a fund. “The technical word for this is “guessing”, which is probably not how you’d like your retirement fund to be handled,” says Nathan.

Index-tracking protects the investor from making emotional decisions based on past performance or current market trends.

He adds that investors will receive superior investment returns (after fees) with less risk using index-tracking funds. Together with low investment fees, this means a return of as much as 60% more over an investment period of forty years.

“The earlier a person starts planning for retirement the better. By knowing more, investors lose less on their retirement,” concludes Nathan.