Keep contributing to a retirement fund
Firstly, retirement saving is a (working) lifetime pursuit. Life expectancies are increasing, which means we all require more money to fund our years in retirement. This is a global phenomenon. You therefore need to keep saving by contributing to a retirement fund until you stop working. If you have stopped contributing to a retirement annuity, it is a good idea to resume your contributions. Consolidating your retirement annuities is also a good idea as you may be duplicating some investment administration costs.
Ensure that you are saving enough
When will you have enough? That is a critical question. The answer depends on the lifestyle you expect to retain in retirement, and when you plan to retire. The sooner you plan to retire, obviously the more money you will need to have saved. The money that you have saved should be enough to allow you to purchase an annuity (monthly income) that replaces at least 60% of your final salary.
Use the 10X retirement calculator to assess your progress
Use our retirement calculators to get a sense of where you stand relative to your retirement goal (final income replacement ratio), based on your current income, accumulated savings and age/expected retirement date. It factors in normalised long-term real market returns, but you can simply change this input (raising or lowering the return). All our projections are in real (after-inflation) terms to give you a true sense of what your money will buy in retirement. The calculator will give you a sense how much you still need to save monthly to reach your goal. If you can’t afford the amount required, it will at least give you a sense of how much you (will) need to cut back on your lifestyle.
Focus on the investment fees and asset allocation of your retirement annuity
As you are saving through retirement annuity funds, I presume you do not have access to a workplace retirement fund, like an umbrella fund or a stand-alone fund. There are two things you need to focus on in your retirement annuity: investment fees and asset allocation. Your retirement investment fees should be as low as possible. Understand that a balanced portfolio that contains 75% in equities has historically delivered a real (after-inflation) return of only around 5% pa – before fees! Fees of 2% or 3% therefore reduce your real (wealth-building) return tremendously. The average fee for retail investors (such as yourself) in the SA retirement fund industry is 3% – that means you lose 60% of your real return. Actually more like 75%, after compounding for 40 years. It effectively halves the value of your final pension. So find a low cost retirement annuity.
Assume age appropriate equity risk
Your asset allocation should match your time horizon. At 48, you can still afford to assume considerable equity risk, if you plan to retire at 65. At 10X, we maximise the equity exposure until 10 years before retirement, to (hopefully) benefit from the long term high real returns delivered by equities over time. In the last ten years before retirement, your focus should shift from growth to preservation, to protect your accumulated savings. At 10X we gradually and automatically reduce the investor’s exposure to equities and replace it with bonds and near retirement, primarily with cash.
Invest in an indexed fund
Finally, think about whether you want your savings managed actively, or through indexed funds. Active managers typically charge higher fees, but many studies have shown that, over time, very few of them deliver higher returns than index funds. It is not possible to predict who those “winners” will be. By investing in a market index fund, you secure the average market return at a low cost. Plus you do not have to place bets on individual retirement annuity fund managers, some of whom may do very well for you, but some may do very poor.
Remember
Past performance is no guarantee of future performance. You cannot afford below average outcomes. Retirement saving is about securing your minimum goal with the least amount of risk. Anything more is a bonus. Holding on to the one bird in your hand is definitely the safer, more sensible and more pragmatic option than speculating on two in the bush.
