Factors that undercut your wealth curve

Moneyweb

Saving enough for retirement can seem like a daunting and complex problem. However, there are really only three things to consider.

“In its simplest form, saving for retirement depends on three factors: time, contributions and returns,” says Adriaan Pask, chief investment officer at PSG Wealth.

“Although you can shift your focus between these three factors, you cannot neglect any of them for too long.”

Vitally, investors also need to appreciate how the three factors interact.

“They need to work in conjunction,” argues Pask. “Investors need to understand how they stitch together and appreciate the trade-offs between them.”

Time

Discussions about how best to save for retirement almost always start with giving yourself enough time. That is because the power of compounding over the long term is the greatest tool that any investor has at their disposal.

“Time is really the easiest of the three factors because it doesn’t cost you anything,” says Pask. “The ups and downs of returns have an emotional impact and contributions have a financial impact, whereas time is just being diligent.

“It’s not just clients that don’t have a strong income that come to us in their forties and they haven’t saved anything,” Pask says.

“It’s often people with a very strong income who just always thought that they would be okay and delayed saving because there were other things that they thought were more important.”

While it’s never too late to start saving, the less time you have, the more difficult it becomes.

Contributions

The second factor is the one that investors have the most control over. It is up to every individual how much they save – and, quite simply, the more you save, the more your wealth will grow.

However, it is crucial for every investor to understand how their level of contributions balances the other two factors.

“A question we are getting a lot at the moment is what do I do when I am getting poor returns,” says Pask. “And the best thing you can do is to up your contributions.”

Returns

Ironically, it is the one over which they have the least control, since markets are largely unpredictable in the short term.

That doesn’t mean returns should be left to chance. Investors should be in the right mix of products and asset classes to achieve targets.