Saving 15% of salary will reap long-term benefits
Research has shown the vast majority of South Africans will not have enough money to sustain them through retirement, especially since increases in VAT and the fuel levy have put further pressure on the average disposable income.
South Africans are seriously urged to save for their retirement as early as possible, and look at the various investment options available.
Those who are investing now for their retirement should avoid some of the common mistakes made, says Steven Nathan, chief executive officer at 10X Investments.
Among the mistakes made are saving too little, paying high fees and having the wrong asset mix.
In fact, the number one reason most people miss their retirement goal is because they don’t save enough.
“No rocket science here. You can’t save like a pauper and then expect to live like a prince or princess in retirement,” Nathan says.
The company’s basic model is referred to as 10X, and is a simple retirement solution. According to this model, people should save 15% of their gross salary throughout their working lives – an average of 40 years – and invest in balanced high equity funds that charge low fees.
On this point, Nathan says fees matter a lot more than most people imagine.
“In the context of a 6.5% real return – which is after inflation – every 1% paid in fees reduces the return by more than 15%. If investors are paying 3% in fees the return will be reduced by 45%, which means more than half of the real annual return is lost to fees.”
When the effect of compounding, where you earn a return on your return, is included, the negative impact can be devastating.
Nathan urges investors to understand the fees they are paying, and to look for low-cost providers that charge no more than 1% in total annual fees.
Another factor in retirement saving is asset investment, and choosing an asset mix that mirrors personal risk tolerance.
“It is critical to grow your savings at a high rate for the majority of your savings period, which is why you should be invested in a high equity fund.
“Life-stage solutions, when one can automatically be switched to the appropriate portfolio as the time horizon changes, is a simple and effective solution.”
Nathan also offers the following advice regarding some of the other commonly made investment mistakes.
Investing in an underperforming (actively managed) fund
With actively managed funds one has a very small chance of choosing a winner, while an index fund ensures the saver earns the average market return.
Nathan says when it comes to retirement investing, it is more important to eliminate the downside risk and reach the minimum savings goal than to entertain upside risk in the hope of overshooting the savings goal.
Chopping and changing funds or asset classes, especially during periods of market turbulence, often leads to buying high and selling low.
If one is over-invested in one asset class or security, they assume concentration risk.This is the risk that one investment will have a disproportionate impact on their savings outcome. As a retirement investor, one cannot afford the downside risk as it may ruin their pension.
Savers should invest in various asset classes (equities, bonds, property and cash), each providing exposure to many different underlying securities.
Saving outside retirement funds
Tax-free deductions and investment returns can potentially increase the value of one’s retirement savings by up to 30%.
“Other savings vehicles, such as bank accounts, stockbroker accounts and unit trusts, do not offer this tax advantage.”
Starting to save too late
Few people in their 20s worry about retirement but, ideally, people should start saving towards retirement from their first pay cheque.
Cashing in savings when changing jobs
Not preserving what has already been saved is a very common mistake in South Africa, with up to 80% of fund members at some point cashing out their savings when they changed jobs.
Underestimating how much money is required
People can avoid this by using a quality retirement that provides a good sense of where savers stand relative to their goal, and what they could do to improve their savings outcome.