Novice wants to start saving

IS IT TOO LATE?: NUTS AND BOLTS TO CONSIDER WHEN YOUR SAVING JOURNEY BEGINS LATE IN LIFE

Robin Gibson from Harvard House advises a reader who only has 10 years to save up for retirement.

Q: I am 56 years old and can work for the next 10 years. My R2.5 million home has a small bond. Apart from an annuity worth about R300 000, I have no savings. My youngest child is almost independent, and soon I’ll be able to save from R10 000 to R20 000 per month. How should I invest this money and how much trouble am I in?

A: The important question is the last one. Any investor needs about R1 million for every R4 200 of monthly income they want before tax and after costs. This yield is constructed to keep up with inflation. You can get a higher fixed yield, but it wouldn’t increase in the future and progressively becomes worth less.

The next important question is what to invest in to maximise a retirement pot. So, based on 18 months of investing R10 000 and then 102 months of putting aside R20 000 per month:

A return matching inflation plus 3% would give you R2 557 618;

A return matching inflation plus 5% would give you R2 820 599,

A return matching inflation plus 0.8% would give you R3 283 603.

Two key drivers affect the investment return.

The first is costs, which reduce returns. The higher the costs, the bigger their impact.

Where investors are usually fooled is that they are led to believe their provider is somehow 25% to 30% better than the rest over a longer period. We are not so sure anyone can consistently claim that. There are good value options out there, so be cost conscious.

The second consideration is your choice of asset class. Investors hate volatility, but growth assets come with it. As a result, most dilute their returns with stabilising asset classes that have no track record of beating inflation over longer periods.

If you want returns of well above inflation, you therefore have to be prepared to live with short-term volatility, with assets in equity and listed property.

Finally, what are your expectations in retirement.

In this instance, you should consider the possibility of downscaling and modifying your lifestyle to unlock the capital in your home. This will both provide more capital and potentially lower your required income.

If we use the example above and assume you successfully build up R3.2 million, your retirement fund grows to R425 000 (in today’s money), and that you downsize and release a sum of R500 000 from the property, then your wealth pool would be around R4.125 million. We could therefore advise taking an income of R17 325 per month before tax as prudent.

That is probably the highest sustainable income you are currently looking at when you enter retirement.

Robin Gibson CFP is a director of Harvard House Investment Management in Howick