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Retirement Planning
Tuesday, September 16, 2014 - 02:18
No quick fix

Very often, people postpone planning for retirement until they are very close to it. But that can leave them severely under-prepared. Consider the following findings from the Old Age Social and Income Security (Oasis) Report.

• Life expectancy is going up, with advances in medicine and technology. And, with time, this will only rise further.
• Savings alone may not be enough. A longer life means you will have to support yourself for that much longer to ensure a healthy and worry-free retirement. To keep ahead of inflation over such long periods, you may need to invest your savings for growth.
• Societal and cultural changes. As the joint family system is slowly but surely disintegrating, it is likely that you will have to fend for yourself after you retire.

Comments, Jo-Anne Bailey, Country Manager: Africa, Franklin Templeton Investments, “The implication is clear: you are likely to live at least 20-25 years in retirement with nothing but your investments to see you through. If you want your retirement years to be carefree, you need to act now.”
The sooner you begin setting aside money for your retirement investments, the better off you'll be. The longer you wait, the more sacrifices you'll have to make to catch up. That's because of the power of compounding. Your investments earn income, and that income earns income, and so on.
Consider, the example of, let’s call them “Fred” and “Sally”, who plan to retire at the age of 60. Let's assume their accounts each earn 15% annually.
• Fred started investing at the age of 25. He invested R10 000 each year for 10 years and then stopped contributing.
• Sally started investing at the age 35 and then invested R10 000 each year for 25 years.

What happened when Fred and Sally reached 60 years?
• Fred's investment of R100 000 had grown to R7 690 000.
• Sally's investment of R250 000 had grown to only R2 460 000.

“As you can see,” observes Bailey, “although Fred contributed for 15 less years than Sally and invested R150 000 less, he accumulated R5 230 000 more because he started investing 10 years earlier and had more time for the compounding to work.
Most people don't start investing for retirement right away because they don't think they have enough money to start. But a large initial commitment isn't necessary. “Making regular monthly contributions, however small, often work just as well in the long run. That's called rand-cost averaging, a great strategy for building a nest egg gradually.
“You put the same amount of money away each month regardless of stock market conditions. While this doesn't assure a profit always, it helps you ride out the downturns and should ultimately increase the value of your investment.”
Starting early with whatever amount you can afford should get you off on the right foot. But don't embark before you develop an overall investment plan, she says. “Just trying to figure out how much money you'll need to retire is a big help in actually saving and investing for retirement.”
When you're investing, volatility and inflation are part of the picture. You need a thorough understanding of these concepts before you move forward:
• Volatility - the ups and downs of investment values - is the trade-off you make when you seek higher returns. The less volatility you can live with, the lower your returns are likely to be.
• Inflation. Most people worry about volatility and overlook inflation, the biggest risk retirement investors face. Because of inflation, a rand doesn't buy as much today as it did five years ago.

“If you think that putting money in a fixed-income instrument such as a bank deposit will be enough, think again,” says Bailey. “Usually, your post-tax returns from fixed-income instruments will just about offset inflation. Inflation could force you to dig into your principal.”
Therefore, your investment returns must not only match your withdrawal rate, but also exceed it. This is particularly important for people who expect to lead a long retired life.
To protect your retirement savings against inflation, maintain a diversified investment portfolio. Your portfolio should consist of securities of all asset classes. While fixed-income securities provide you with regular income at low levels of risk, equities and equity funds historically have provided a better cushion against inflation.

Asset Allocation

How much you should invest in each category should be a function of the stage of life you are in and your risk-taking capacity. Typically when you are starting out, your investment strategy should be weighted in favour of growth. As you approach retirement, consider adjusting your investment mix to reduce the overall volatility of your portfolio.
How much will you need to save? One of the most important things you can do is to figure out how much you'll need to pay for your retirement. One useful rule of thumb says that retirees need to replace (from provident funds, corporate pension plans, investments, and other sources) at least 70% to 80% of the income they were receiving just before they retired.
“Once you have embarked upon your plan for retirement investing, here are some time-tested suggestions to help ensure that you reach your goal of a secure retirement,” she says.
Make the most of "automatic" investment opportunities, using a debit order system. Once you've enrolled, the plan provides the discipline of regular additions to your investment portfolio. And because the money is deducted from your pay check, you're never tempted to spend it on something else.

Monitor your progress

Every one to three years, check your overall progress towards your retirement goal. Just having a financial plan does not solve all your problems. As time passes, your life stage changes and so do your needs and income. You need to monitor and review your plan and your asset allocation. Ask questions such as:
• Have my needs changed?
• Have my personal circumstances changed in a way to impact my plan?
• Has my ability to tolerate volatility and other investment risks changed?
• Have market conditions altered in a way that could impact my plan?
• Has my plan performed poorly?

Don't change your asset allocation unnecessarily. The stock and bond markets move up and down over short periods, and you could miss important gains if you overreact to short-term changes. However, if you have answered "yes" to a question above, you may want to change your asset allocation.
Stay the course. Even if you think you're ahead of schedule in achieving your retirement plan, stay the course and continue investing. Financial markets can rise or fall dramatically over short periods, so what seems like good fortune may be an illusion. Only when you have been ahead of schedule for a number of years, and you're close to retirement, is it prudent to begin slowing down on your retirement account contributions.
She warns that you must expect years with losses. . “A portfolio of stocks and bonds will exhibit short-term volatility. We know that no one can predict consistently when a market drop will happen—or whether it will be a slight dip or a prolonged decline. This is generally an uncomfortable time for investors, especially if the market remains down for a long time.”
History suggests that what goes down also goes up. Over the long term, the stock market has outperformed other asset classes, and the additional risk you have taken might reward you over time.
However, if you have trouble accepting short-term setbacks, you should increase the portion of your investments in more stable options, such as money market and short-term bond mutual funds-understanding that with lower risk may well come lower long-term returns.
Think in terms of your overall portfolio. Don't evaluate your individual funds in isolation. Think instead of your total investment portfolio. The reason for holding a variety of assets is that the gains from one investment may help offset short-term losses in another. This diversification helps smoothen the overall investment performance of your portfolio and makes it easier for you to accept the ups and downs of the financial markets.
Don't spend your investments before you retire. You might encounter situations where you are tempted to withdraw from your retirement investments. Try to refrain from such withdrawals since it will derail your carefully drawn plan and you'll have a hard time replacing the lost retirement savings later.

Copyright © Insurance Times and Investments® Vol:27.9 1st September, 2014
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