Pension savings trump returns

YOU ACHIEVE MORE BY SAVING FEW EXTRA RANDS MONTHLY

When saving for retirement, there are three big factors that impact the final outcome: how much you save, what return you get on your investments and how long that growth has to compound. Many investors tend to focus mainly on the second, spending much time worrying about how their portfolio and its underlying funds are performing.

This can become such an obsession it may even cause them to mistakenly chase performance and try to pick the best funds year after year. They move their money between funds regularly trying to capture the best returns.

The major problem with this thinking is that performance is one factor an investor cannot control. You can make sound decisions about which funds you use and, therefore, give yourself the best chance of seeing good returns, but nobody can predict the markets. No investor, financial advisor or fund manager can make any decision that they’ll be certain will guarantee an extra 1% return over the next year (unless it’s switching from one bank deposit to another).

Investors should rather spend more time considering the factors they can control:

1. How soon you start. Begin investing for retirement as early as possible. The more time you have, the greater the power of compounding becomes.

For example, assuming a 10% annual growth rate, an investor saving R1 000 every month from age 20 would accumulate over two-and-a-half times as much money by 65 as someone saving R1 000 every month from 30. This, despite only contributing 28.6% more. The major difference is time.

2. How much you save. Most don’t realise this has a bigger impact than the return they achieve.

Every extra 1% you’re able to save is worth more than an extra 1% return.

For example, consider an investor saving R2 000 per month. A 10% return over the year means they’d have R2 200 at the end of it. If they saved an extra 1% (R20), earning the same 10% return, at the end of the year they’d have R2 222. If, however, they saved only R2 000, earning an 11% return, they’d have R2 220.

That difference may seem very small, but it has an effect over time.

Earlier this year, the annual contribution limit on tax-free savings accounts was increased 10% to R33 000. If every investor made that additional contribution (R250 per month), they’d make a very big difference to their final outcome.

The significant thing for investors to appreciate is that the factors that lie within their control have a major impact on their wealth.

Instead of worrying about finding a fund that could give an extra 1% a year performance, they would achieve more by saving a few extra rands every month.

Nobody can predict the markets.