Brett Mackay, Investment Consultant at 10X Investments, gives some basic advice on how to tackle the five most common concerns he hears from members of the public.
1. I can’t afford to save enough.
Anything you save is better than nothing. Start small, and increase your contributions over time. There are flexible retirement annuities available where you can add a lump sum, small or large, should you get a bonus or another financial windfall. You can also make changes to your debit orders easily and often.
If you save steadily and for a long time, a third force will come into play to help grow your money: compounding. This mathematical phenomenon will drive exponential growth of your savings if you keep reinvesting your returns.
The rate of return on your initial capital keeps growing, even if you earn the same rate of return on your investments year after year, because you earn a return on your returns as well as on your capital. In time, the returns will be larger than the amount you saved.
2. It is too late.
One of the most common problems with retirement saving is that people start planning far too late. There is no point beating yourself up about it, though. The best time to start saving for retirement is when you start working; the second best time is right now.
It is seldom too late to improve things. Start with a retirement savings plan. Input some basic numbers (age, salary, savings) into a retirement savings calculator and work out a savings goal.
This free-to-use retirement savings calculator allows you to change inputs – such as how much you save each month and your desired retirement date – and generates a plan for you. Your customised retirement plan will be emailed to you for future reference.
3. I don’t understand the stock market.
To give your money the best chance to grow you need to give it the chance to earn returns that outpace inflation over time, which means putting some money in the equity markets. Historically, this has been the most reliable way to build wealth.
There is no need to understand the market or to forecast future winning stocks, though. Rather own a slice of the whole market by buying into a low-cost index fund. The market beats the stock pickers nine times out of 10 and index funds are generally a much cheaper option than actively managed funds.
4. I am never going to accumulate enough.
This issue talks primarily to two things: how much you save and how much you draw down once retired. It is important to focus on aspects (of both) that you have control over, most importantly: How much you save and how much you pay away in fees; how much you spend and, again, how much you pay away in fees.
This retirement savings calculator will help you to work out how much you need to save now to be able to preserve your lifestyle in retirement. We say a good guideline is to put 15% of your gross salary into a retirement fund for your entire working life. If you start saving later you will need to save more or adjust your expectations downward.
Most people do their retirement saving through their company, and some companies match the employee’s contributions. If you are one of the lucky ones, make sure that you are maxing out on this benefit. If your company matches your contributions up to, say, 20% of your salary but you are saving only 10% of your salary, you are turning down a large chunk of your potential earnings.
You are also rejecting an additional tax refund. Money that you or your employer put into your retirement savings fund is deducted from your taxable income. For example, if you earn R500,000 a year, and contribute R50,000 to a retirement annuity (RA) during the year, you’re taxed on only R450,000. (This is to illustrate the principle only – in reality, your tax calculation will probably include other tax deductions.)
If membership of a corporate fund is not an option for you, an individual retirement annuity is the way to go. You will also earn a tax refund on money invested in a retirement annuity.
In both the accumulation and the drawdown phases the fees you pay play a crucial role in how much you will get at the end of the day. Keep fees to a minimum. The industry average is 3% in fees. Try to keep your fees below 1% if possible. It might not sound like a lot, but an extra 2% of the value of your whole portfolio compounded over 40 years of saving can make an enormous difference.
5. I have already made too many mistakes.
Regretting starting late or cashing out your savings to buy a cool car when you changed jobs is very common. Do not take all this regret into retirement with you. The past is over. Rather focus on the things you can control.
Give yourself a talking to and commit to not repeating earlier mistakes. If you change jobs again, do not cash in your savings; rather transfer them tax-free to your new employer’s fund or ring-fence them (also tax-free) in a retirement annuity.
No matter what you have done in the past you can always make the future better. Do a proper audit of your financial situation, change the things you can, and look forward to feeling relieved that you woke up and made some changes before it was too late.