Retirement savings: What you need to know
Saving for retirement is one of the most important things you can do throughout your life. Unfortunately, many leave this critical financial objective for the last minute, scrambling to ensure they have enough funds to retire comfortably. Below, we look a
While you should effectively take advantage of the benefit of compound interest while retirement is still far off – compound interest is when interest earned on the money you save accrues interest itself, this essentially causing your funds to snowball – there are many other factors to be aware of when planning your retirement. It is also vital you choose the right savings vehicle to suit your needs.
Jeanette Mara is , director of distribution and client s ervice at
Allan Gray, says: “When investing for retirement, it is important to plan for future increases in prices and future increases in your standard of living.
“Price inf lation is a general increase in prices and a corresponding fall in the purchasing power of your money. Salary increases that keep pace with price inf lation allow you to maintain a fixed standard of living over time. However, salary increases that exceed price i nf l at ion may i ncrease your standard of living and therefore your cost of living. You can think of this as ‘ lifestyle inf lation’, which is the increase in your standard of living over time.”
She says that as y ou become accustomed to a certain lifestyle, you will need to increase your retirement savings to maintain this standard of l iv i ng, or other wise risk spending far beyond what your retirement savings will allow.
Another factor you need to keep in mind is market volatility – this ca n affect the longevity of your savings. While market volatility is to be expected – it is a normal part of investing – it is something you need to take into account and effectively combat to ensure optimal performance of your retirement vehicle.
“To achieve above-inf lation [real] returns, you need to be comfortable taking on some risk. History has shown that over the long term, equities provide the best return. While returns do not come in a straight l ine, f luctuations smooth out over time. If you invest in equities, you need to be comfortable with a bumpy ride,” says Marais.
Spreading your risk by investing in various sectors and industries will ensure you are adequately equipped to tackle market volatility.
Says Mark Lapedus, head of product development at Liberty Investments: “Market conditions in general have an impact on all investments including retirement sav i ngs. Inf l ation will contribute to the client’s income goal i ncreasing over t i me a nd market volatility will affect the value of the savings and, as a result, the benefit that this can produce.
“Having said that, this is not necessarily a bad thing – consider a client who only invests in cash where t he volatility is very low. He will probably have a worse outcome over the long term, compared with a client in a portfolio that can produce returns ahead of inf lation even if the portfolio is volatile.”
Keep in mind, says Braam Fouché, f inancial adviser at PSG Wealth, that i nvestment returns are a net result of asset allocation – your choice of assets – less fees. He says you need to “ensure your savings vehicles are cost-effective, completely transparent and reviewed regularly, with a clear indication of contributions, costs and returns. Some companies furnish you with an elaborate annual statement that includes all but your real results.”
It’s never too late to save – ensure your f inancial independence during retirement by starting today. Do this by consulting a f inancial adviser and looking into savings vehicles.
Says Fouché: “Through careful planning and allocating your capital to diverse assets, you can achieve a comfortable retirement. Savings are not only the f i xed debit-order or employment-based retirement plan you sign up for, but also the assets you acquire, like property and equity, along the way. The combination of these plus personal savings and employment-based savings should be focused collectively to generate this exact result [a comfortable retirement].”
PLANNING AND ALLOCATING CAPITAL TO DIVERSE ASSETS, YOU CAN ACHIEVE A COMFORTABLE