South Africans need to stop making excuses and prioritise saving for retirement as early as possible, 10X Investments Senior Investment Consultant Michael Rossouw told Business Tech in an interview.
“One of the trends I’ve seen with young investors is that they don’t want to save for retirement because, they say, ‘What if I pass away? I would have been saving for nothing’,” said Rossouw.
“I speak to older people every day who once had the same idea – and are now stuck without provisions for retirement.”
Rossouw said it is very important to remember that the sooner you begin saving for retirement, the less money you’ll need to contribute overall.
“Assuming a 6% pa real return (after fees and inflation) over the entire period, if someone invested R1,000 per month for 10 years from age 20 to age 30 and then stopped, they would have a larger retirement fund at 65 than someone who invested the same monthly amount for the 35 years from 30 to 65 years old,” said Rossouw.
“Looking at it another way,” he added: “If you start saving at age 25 you can expect to contribute around 25% of your ultimate savings goal, while the market will contribute the other 75%. If you started at 35, you must come up with more than a third; start saving at 40, and you will have to save more than 50% of the total.”
However, Rossouw stresses, it is never too late to begin saving for retirement.
“Even starting a retirement annuity five or ten years before your retirement you get the market to do some of the work for you.”
Passive vs Active
Rossouw said that a key consideration when starting a retirement fund was deciding whether to choose an active or passive investment option.
Passive retirement funds give you the average return from a section within the entire market (called an index of stocks), effectively allowing you to buy a slice of the market. Active funds, on the other hand, select particular stocks that they predict will outperform (but could just as easily under-perform).
“While active funds sound fantastic in theory, this is not necessarily the case in reality,” said Rossouw.
10X Investments has completed thousands of reports comparing prospective clients’ current retirement funds (largely active funds) and the passive ones offered by 10X Investments. In my experience, the passive funds generated higher returns more than 80% of the time.
“If the probability of success for an active fund manager is just 20%, it is worrying that the majority of retirement funds in South Africa are actively managed,” Rossouw said.
Thankfully, South African investors are becoming more educated, said Rossouw.
“We are happy to see more that customers approaching us are more knowledgeable than in the past, and we try to educate them further,” he said.
One area that 10X Investments focuses its education on is investment fees.
“Full disclosure of these costs is often difficult to access if you don’t know what to ask for,” said Rossouw.
“This is why we tell people to ask for the Effective Annual Cost (EAC), as this helps you to understand what you are paying in total.”
10X Investments prides itself on offering low fees as this maximises the profits for its customers.
“We charge low fees, meaning that our clients make the most money possible,” said Rossouw.