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Packing enough for your retirement

15 August 2008 Gareth Stokes

A large part of the financial services industry exists to ensure that individuals can adequately prepare for their retirement. There are hundreds of vehicles they can use to achieve this goal – from the annuities, pension funds and endowments offered by l

Get an early start

The best bit of financial advice we can think of is to make sure you start early enough. Every projection you encounter tells a similar story. The sooner you start saving toward your retirement goal the better. Each year that you delay requires you to surrender more of your take-home pay to make the same retirement provision. So the earlier you begin contributing to your retirement fund the better. What makes this the case?

The answer is simply this: The longer you remain invested the more return you earn on your return. It’s a clumsy sentence – and most financial analysts will explain the concept using the term ‘compound interest’ instead. You earn interest not only on the money you invest; but on the interest you’ve earned on that money too. Over one or two years the amount is insignificant – but compounded over 20 years it becomes an absolute avalanche of funds.

And there are other useful tips to follow too. One of these is to make sure that your monthly contributions to retirement savings keep track with inflation. If you’re part of an employer run pension fund this condition is taken care of through annual salary increases. The percentage contribution taken from your monthly salary goes up each year as your salary goes up. If you are making your own retirement provision you should ensure that you make the adjustment on an annual basis.

Without discipline you have nothing

Have you ever wondered why the retirement annuity and pension fund is such a popular retirement saving mechanism? After all – there are hundreds of articles warning you about the negative long-term impact of fees and poor management on the overall return of these funds. You prefer these investment products because of the strict rules governing how you access these funds. You cannot dip your hand into the pot whenever you like. And provided you don’t withdraw money from your pension and provident funds when you change jobs you will benefit from the full impact of compound interest returns over the life of the investment.

The same cannot be said for other investments. We’ve heard hundreds of stories about individuals who save money using unit trusts. Unit trusts are a very sensible savings alternative run under the Association of Collective Investments’ banner. The problem is you have continued and immediate access to the funds in your unit trusts. As soon as you run into a personal financial emergency you can simply pick up your phone and sell your units, with the available funds paid out to you within days to spend on whatever you choose. The same holds true for investments in cash, bonds and property... You have easy access to any of these assets.

Once you’ve cashed in a portion of a long-term investment it takes years to recover. As we mentioned earlier in this article the secret to successful retirement saving is twofold: time and compound interest.

How about shares for a pension alternative

If you have the ability to make your own rules and stick to them there’s no reason you cannot create your own ‘pension’ fund by making long-term investments directly into a portfolio of blue chip shares. What you want to do is choose up to 10 solid companies listed on the JSE and make regular purchases of shares in these companies. By doing this you effectively create your own unit trust without the management fees...

We can already hear the objections. Active fund managers are going to make a total mockery of your investment returns. But pay no attention. You’re not going to look at the performance on these shares – you’re not going to look at the prices – and you’re not going to sell them for the next 15 to 20 years. And here’s the most important rule – you’re going to re-invest all the dividends, special dividends and interest you receive from these shares without exception. When you pull the wraps off this portfolio in 20 years time you should have a substantial capital lump sum generating a useful ‘tax free’ dividend stream each year.

Of course there’s risk associated with an ‘all you eggs in one basket’ investment strategy. You also expose yourself to risk should one of your chosen shares run into trouble. But you won’t be complaining if you run this strategy alongside your existing pension and retirement investments.

Editors’ thoughts:
There’s no beating the pension fund or retirement annuity for long-term retirement savings. But direct investment in the stock market can provide a useful additional retirement safety net. Do you invest directly in JSE-listed shares, or do you consider this to be too risky? Add your comments below, or send them to

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