It is imperative that members of defined contribution pension/provident funds or retirement annuity funds invest their retirement savings wisely, or suffer the consequences if they are relying on these funds to provide an income when they retire.
South Africa, unlike many other countries that provide a social security safety net, provides ‘no bail out’ if members have insufficient savings for their retirement years.
Saving for one’s retirement is extremely difficult, as there are many unknowns i.e. what will the cost of living be when you retire? How long will you live after you retire? What investment return will you have achieved?
Saving for one’s retirement should be planned over a period of 40 plus years. Even after retiring we can realistically expect to live for another 20 to 30 years. Retirement investing should have a long term investment horizon and selecting an investment strategy aimed at meeting that long term objective should be done with great care and professional assistance.
Sadly, what often happens is that fund members, constantly bombarded with news about investments, end up either being too conservative in their investment strategy, as they are fearful about losing money or try to “time” the markets. Members need to block out the noise about what is happening in the short term and stay the course with a long term investment strategy.
Over the past eighteen months investment markets have delivered low investment growth, together with high levels of uncertainty and volatility. Investors are understandably concerned and asking whether they should continue with their long term investment strategy.
Over this period, members would have probably achieved a higher return investing only in cash but recent market volatility does not negate the strong performance of the markets over the longer term.
No one is able to predict the future and political uncertainly with low economic growth does not bode well for investment performance. The benefit of investing in the markets over the longer term is by the compounding of investment returns and not market timing. The problem with investing in cash is deciding on the right time to invest back in the markets. Old Mutual Multi-Managers amongst others has, over the past number of years, introduced inflation plus targeted investment strategies. These strategies state the recommended time horizon for an investor to invest in a fund in order to achieve the targeted return and the higher the target above inflation, the longer the time horizon for delivery. These strategies reduce market risk as members know the time horizon expectation for the fund to deliver and then should not, be concerned about short term market volatility.
The reality is that uncertainty has always existed and the most significant threat retirement fund members face is inflation risk, rather than market risk. There have always been geopolitical conflicts, policy uncertainty and natural disasters and investors who sat on the side-lines and went into cash as a safe haven until the ‘dust settled’ missed out when markets started to recover.
Often the most dangerous times to invest have been when the future was looking particularly rosy and everyone was confident, such as in 2007 or 1999, which were followed by periods of significant market losses. Inflation is a cancer that slowly and consistently gnaws away at the real value of savings. It steadily corrodes capital and, unlike market volatility, offers no respite.
The only asset classes that consistently outperform inflation over the longer term are equities (shares) and property and both require the investor to accept market volatility. The regulations for pension fund investments protect members from concentration risk (having too large an exposure to a single asset) and all funds approved for retirement fund investments are required to be reasonably diversified when investing outside cash. Diversification actually reduces market risk and volatility.
A carefully thought-out long term investment strategy, together with a reputable asset manager with a consistent performance history, will deliver the ultimate long-term investment goals. Although past performance is no guarantee of future performance, history tells us to patiently stick to our long term investment strategy if we want to achieve our long term investment targets.
Investment returns are not the only means of securing a retirement future and members should assess whether they are contributing enough to their retirement funds. Most employer-sponsored funds do not maximise the tax deductible contribution allowance.
So, instead of trying to predict what the markets will do, members should review their budget and try to increase their monthly contributions. The tax system assists members as it allows a tax deduction for all contributions of up to 27.5% of the greater of remuneration and taxable income, capped at R350 000 per year. This assistance in saving for your retirement is significant, plus all investment returns within a retirement fund are tax exempt.
Disclaimer:
Old Mutual Wealth (“OMW”) is an elite service offering brought to you by several licensed Financial Services Providers in the Old Mutual Group (“the Old Mutual Group”).
Old Mutual Wealth (“OMW”) is an elite service offering brought to you by several licensed Financial Services Providers in the Old Mutual Group (“the Old Mutual Group”).
This article is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. OMW, the Old Mutual Group and its directors, officers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this article.
News supplied by Janine Player CFP®, Financial Planner and Employee Benefits Consultant for Private Wealth Management.