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Most people experience some financial pain when they leave the ‘working field’, as their savings won’t support the accustomed lifestyle. Whose fault is that? Batsmen who show poor form or don’t wear the proper gear only have themselves to blame, if they take a body blow. It’s the same with your retirement savings. Ultimately, the onus is on you to ward off a poor outcome. To do so, you need the right technique and to back it up with the right safeguards.
Master the basics
To excel in any field requires a mastery of the fundamentals, usually through endless practice. Author Malcolm Gladwell put the required number of hours at roughly ten thousand. It should take you no more than a few minutes to grasp the fundamentals of retirement saving, but to become master of your retirement you need to practice them over your entire savings life.
- Save enough. Don’t expect to retire like a prince if you save like a pauper. Put away at least 15% (net of admin fees and risk premiums) of the income you wish to replace in retirement, a bit more for women as they, on average, live longer than men.
- Start early. Ideally, save for your entire working life, starting with your first paycheque. The sooner you start, the more you benefit from compounding returns. The big kicker comes in the last ten years of a 40-year savings term, so you lose out if you only start in your thirties.
- Preserve your savings when you change jobs. If you cash out, you not only lose your accumulated savings, but also the return you would have earned on those savings for the rest of your life. It is practically impossible to make that up later in life.
- Save within a retirement fund. Only pension, provident and RA fund members get the benefit of tax free contributions, returns and lump sum payments. These can potentially increase the value of your retirement income by up to 30%.
- Let your time horizon guide your exposure to the share markets. For long-term investors, a high equity portfolio presents less risk than a low equity portfolio, simply because it has the prospect of a much higher return, despite more volatile near-term returns.
- Diversify and rebalance. Spread your investments across a variety of different asset classes, securities and currency exposures, for a higher and less volatile return. By rebalancing regularly, you lock in some of the gains on investments that have done well and you buy more of the ones that have lagged behind.
Risk and reward are linked, both in cricket and investing. You won’t score a six with a defensive short, and you won’t double your money holding cash. You need to take some risks to get ahead, but there is no point taking risks that don’t offer a commensurate reward. Some of the retirement industry’s practices fall into that category. They hold no prospect of a higher return for the average investor, yet they may bowl you out of a comfortable retirement. However, with the right armour you can avoid this.
- Do a retirement plan. This is your personal investment policy statement. It defines your savings goal and the optimal long-term investment strategy to achieve it. Put this on record, because what is optimal long-term may not appear optimal in the present. The markets will test your faith from time to time; this is when you refer back to your plan, to re-affirm your course. The planning process will also make you a more informed investor, able to distinguish between beneficial and self-serving industry practices.
- Use market-tracking index funds to avoid manager selection risk. Relying on active managers will, in all probability, give you a sub-optimal outcome. There are dozens of fund managers and hundreds of funds, all trying to beat the market return. Some will do really well, but most won’t; in fact, net of fees, the majority will deliver lower returns than comparable index funds, and a few will fail spectacularly. No one knows who the star managers will be, so your manager selection is a gamble, with the odds stacked heavily against you.
- Avoid high-cost products. Higher fees do not beget superior returns; in fact, based on past research, they are a leading indicator of lower returns. Every 1% pa in fees reduces your longterm savings outcome by some 20%, so make it a rule to avoid long-term investment products that cost more than 1% pa.
Keep your eye on the ball
Batsmen get hurt when they take their eye off the ball. For retirement investors, the “ball” is an optimal savings outcome in thirty or forty years’ time – not at year end. Going after such a longterm goal requires a strategic rather than a tactical approach (which is why your retirement plan is a strategy document). Stick to the plan, even if another appears more profitable at present. If you pursue what has just done well, you will invariably be buying high and selling low. And, as you cannot reliably predict the big market turns, switching ahead of time is just as pointless.
Unfortunately, the investment industry is more concerned about short term outcomes, so much of the expert advice and market commentary you might hear is of a tactical nature, telling you how to invest your money right now. But these ‘experts’ are just ‘talking their book’. If their views had any real value for you, they would not share them so freely.
So, don’t let the industry’s ‘sledging’ put you off your game. Remember when Ben Stokes swore at Temba Bavuma last January? Later, after he had completed that historic maiden test century, Bavuma said “it fired me to knuckle down and stay focused on the task at hand.” That’s exactly what you need to do, if you want to celebrate your retirement one day.