Your early working years can be so hectic, long days spent navigating fast-changing worlds, with office politics and life partners – perhaps even a young family – placing further demands on you. How in the world are we are supposed to be planning for the long-term, choosing an investment portfolio, selecting a retirement provider, and so on?
Well, from one over-stretched worker to another, stop panicking and listen up. Planning for a dignified retirement is not easy, but it is simple.
It used to be the norm for companies to provide pension funds for their employees. It was also usually compulsory for employees to join the employer’s fund. However, these days fewer companies offer employees this ‘perk’ so responsibility tends to fall on the individual. But with a huge industry offering thousands of options, how can the average South African know where to start?
The complexity of what is available is one of the reasons so few South Africans get around to taking even the first step to ensuring a dignified retirement. It is also why, according to National Treasury, only 6% of South Africans are on track to retire comfortably.
I agree that the average citizen already has too much on their plate to try to understand the intricacies of the investment world, but it is essential that we all do some basic retirement planning. The good news is that setting yourself up for a decent old age is not even as complicated as many of the other things you have already conquered, especially if you start saving early.
I am going to list a few simple basic guidelines to follow:
Fees are the single most reliable predictor of your investment’s performance and, therefore, of retirement saving success.
Make sure you keep yours low. Ask for the effective annual cost report. If your investment provider doesn’t prioritise low fees (and walk the talk), walk away.
Stay the course: do not cash out your savings. People often cash out their savings when they change jobs, thinking they will make it up later. The bottom line is that you probably won’t. Even if you do contribute the amount you cashed out you will never get back the time those savings had to grow.
Trust can be misplaced. Because a company has been around for decades and is well-known does not mean it is the best place to invest your hard-earned cash. Choose a fund manager that will give you the best chance of the best outcome, rather than one that has big offices around the country, sponsors major sporting events and runs impressive television ads.
Look at the fund’s long-term track record. Ask for a fund factsheet and look at the track record of the specific fund you are investing in (not just any fund run by the company). Does the fund have a record of delivering inflation-beating returns?
Investment style: You will not need to do too much research to discover that index funds outperform actively managed funds over the long-term. Some active funds will occasionally outperform index funds in a year, maybe even two, but that is where it ends. Over the long-term, passive funds have been shown to outperform the majority of active funds. Retirement savers are in it for the long term. Simple.
Be wary of what looks like a free lunch. If you are offered a product with a “booster” or a “bonus”, the chances are that you will be financing this “bonus” through fees charged upfront or over the long term.
And, a final word of warning, always choose evidence over emotion. Whether you are just starting your working life or are 20 years into it applying the above basic principles will definitely save you time, money and hassle. It will also ensure that you are on track to get off the treadmill and enjoy the fruits of your hard work when it is time to retire.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice.
