Five factors that can scupper the best-laid financial plans
Saving for retirement is no easy task. The path is littered with obstacles: some beyond your control and some that are of your own making. What is the investor to do? They have to moderate their behaviour to avoid obstacles of their own making and plan fo
1. Markets move in cycles
Your retirement plan is usually heavily dependent on the performance of the general economy. During boom times when companies post record results year after you’re your investments perform well and the game looks easy. But when markets turn suddenly you notice holes in the plan. Although you cannot predict the shift from bull market to recession you have to be aware that markets move in cycles. Luckily for us the ‘good’ cycles usually outlast the ‘bad’ by some period of time. Unluckily the price falls during bad times are usually more severe than the rises that precede them. Financial planners combat shifts in economic cycle by balancing risk. They use techniques like ‘life stages planning’ and asset allocation to ensure that these market cycles are smoothed out over time.
2. The terrible twins: interest rates and inflation
We don’t have to tell you how devastating rising inflation and interest rates can be. South African consumers have seen repeated interest rate hikes in the last two years as Reserve Bank Governor Tito Mboweni battles vainly to bring the country’s inflation back into the 3% to 6% target range. The challenge for the retirement saver is to ensure that his portfolio of investments is achieving a real return. He has to strive for a return in excess of inflation – otherwise he’s going backwards. We’ve entered a period where achieving this real return is going to be very difficult. Inflation is spiralling out of control while business is contracting… And to make matters worse we have a very shaky situation on global markets.
3. Those insufferable politicians
Politicians and their decisions have a definite impact on your retirement savings plan – in more ways than you realise. In the first instance, political instability can have a huge impact on how a country is received on the international stage. South Africa’s honeymoon period is definitely over – as demonstrated by the slide in the rand and JSE-listed shares when Finance Minister Trevor Manuel announced his resignation from cabinet recently. Although Manuel has indicated he will return if asked to do so we’ve all learned a lesson about how fickle international investors can be.
The other area where politics could impact your long-term retirement funding strategy is in policy making. There are two big changes being bandied about by the ANC ruling party right now. One of these – plans for a National Social Security System (NSSS) – has been on the table for some time now. While the final solution is not yet known it’s clear the proposed changes will have a huge impact on existing and future savings strategies. You will have to make adjustments to your savings habits to accommodate them. The second area is the Department of Health proposal to introduce a National Health Insurance. If this goes ahead the amount of free cash available for retirement planning will dwindle further!
4. Laws that drive you mad (taxation and foreign exchange controls)
South Africa has a number of legacy issues that affect savings strategies. Although changing tax laws can assist or hinder your retirement funding objectives, many planners struggle with the country’s restrictive foreign exchange policy. Local investors cannot freely move their funds around the globe without running into problems. It’s quite difficult to modify your financial plan to work around such restrictions. And there’s a big risk that future governments make unexpected changes to tax and foreign exchange legislation which could leave you badly exposed. Again, the best advice is to structure a financial plan that takes account of the ‘fluidity’ in these areas… Cover all bases and you’re not likely to suffer from sudden shocks in these areas.
5. Financial disasters and scandals
The last factor we’ll discuss today is financial disasters and scandals. Local consumers are all too familiar with so-called reputable institutions going belly up – and taking their hard earned savings with them. We hear about MasterBonds, LeaderGuards and Fidentias on a daily basis… And there are dozens of genuine ‘fly-by-nights’ that hardly get a mention. It shouldn’t be too difficult to avoid such disasters. The basic rules include doing proper research before investing your funds, sticking with well-known and reputable companies, not committing all your funds to a single company or institution, and at all times tempering your expectations. Remember – if an investment sounds too good to be true it usually is.
Editor’s thoughts:
We’ve covered a range of factors that can cause fluctuations and challenges in reaching your retirement savings goal. Investors need to know that they have no say in how and when these factors take place. But sensible planning will ensure that the impact won’t wipe you out. Are you confident that your retirement plan can withstand these unexpected threats? Add your comments below, or send them to [email protected]
