Your biggest savings and investment mistakes - and how to fix them

The journey to financial freedom starts and ends with saving and investing. A few trust-fund babies and world-famous entrepreneurs apart, the only way to walk this path is to spend less than we earn - and put the difference to work.

But where to put it? Is it possible to work your whole life with the peace of mind that your hard-earned money is being looked after, and will provide for you when you retire?

The short answer is yes, of course. Assuming that you understand what not to do, the actions you need to take become clear and compelling. Let’s look at some of the worst mistakes you can make on behalf of your future self, across the three main stages of life and the investment products associated with those:

• retiring with a living annuity
• preserving your current mid-career pension or provident retirement savings with a preservation fund
• saving for retirement with a retirement annuity
• putting disposable income to work with discretionary investments

Choosing the wrong retirement product: misunderstanding the case for living annuities and guaranteed annuities

We’ll start with the last, and most important retirement-related decision first. When you retire you are obliged by law to use at least two-thirds of your retirement savings to buy an annuity, which will pay you an income in retirement i.e. a pension. You can choose between two types of annuity: a guaranteed (also known as a life annuity) or a living annuity.

With a life or guaranteed annuity, the insurer pays you a specified monthly pension for the rest of your life. Choosing a life annuity insures you against longevity risk (the risk that you outlive your savings) as well as investment risk (depleting your capital too soon due to inadequate investment returns).

You do not, however, have any control over how your money is invested, nor any flexibility to draw a lower or higher income when your expenses change. Also, your policy dies with you, and no money passes to your heirs.

A living annuity transfers the risk and responsibility for securing an adequate income for life to you. In return, you have greater investment and income flexibility, and your heirs inherit whatever is left of your capital after your death.

Choosing between a living and a life annuity at retirement requires a careful evaluation of your personal needs and circumstances. This is a critical decision – with income, tax, estate planning and risk implications – so you should consider your options carefully before committing. You can read more on these considerations in our blog Retiring with control and flexibility: Living annuities in a nutshell, or if you think you your current living annuity could be doing more for you, you can use our EAC calculator or get a free cost comparison report from 10X.

Your pension fund: losing out massively in retirement by failing to preserve

All of change jobs, some of us quite a few times! If your current or previous employer had a company pension or provident fund, when you leave, you have the option to cash out some or all of those funds, or to reinvest them in a preservation fund. The cliched horror story goes something like this:

“On leaving my former employer at age 29, I didn’t preserve my retirement fund. Instead I cashed out and bought a car. What I didn’t consider was that this would not only cost me my savings, but also the return thereon for the next forty years or so. The money would have grown six or seven-fold by then, in real (after-inflation terms). Cashing out early not only took a big chunk out of my retirement income but also made for a very expensive car.”

According to various industry surveys, between 70% and 80% of employees don’t preserve when they change jobs. Younger employees, especially, want to keep up with the Joneses, and think they have plenty of time to make up these savings. They don’t appreciate the long-term value of those early savings. For example, in the context of a diligent 40-year saving plan, the first two years’ contributions already fund 10% of your pension. It’s not so easy to catch up by saving more later. Do your sums with our preservation fund calculator and see for yourself. The sensible option when you change jobs is to transfer your savings tax-free to your new employer’s fund or to a preservation or RA fund. This preserves not just your savings and attached tax benefits, but also keeps your money growing, until you do claim.

Investing in the wrong retirement annuity: paying high fees, and not taking enough risk

We’ve all heard a story like this one:

You start your first proper job, and trying to do the right thing, take out a retirement annuity a friend’s broker recommended with a ‘medium risk’ portfolio. You get locked into a 15% per year premium increase for the next thirty years, ostensibly to ‘keep abreast of inflation’. The R1m illustrative nominal maturity value at age 55 seems like a fortune. But, the broker makes no mention of any big early termination penalty fees, and doesn’t speak about fees even though they’re well above 3% per annum (and even if he did would you have been able to truly understand what that means for your retirement savings?).

And therein lies the rub. Aside from not grasping that a 1% savings in fees can mean up to 30% more at retirement, you also don’t consider how purchasing power (the value of R1 now vs R1 in the next five years) can be eroded by inflation, so investing in a medium- rather than a high-equity portfolio effectively diminishes your long-term return.

Like so many other uninformed investors you got persuaded to buy an inflexible, high cost, low return savings product that doesn’t build any real wealth. Remember: you must project the maturity value (what your retirement savings will look like when you retire) in inflation-adjusted terms to get a true depiction of how much you will have.

Luckily, there’s a better way. If you think your retirement annuity could do better for you, try 10X’s retirement annuity calculator or get a free cost comparison on any retirement savings you might hold.

Your discretionary savings: inadequate diversification, and no discipline

We’ve all been to the gym and overheard an ‘experienced investor’ lamenting their luck:

“My portfolio includes shares with a solid long-term growth record and decent dividend yields. Although I’d spread my money across industries, countries and currencies, it wasn’t actually diverse enough. The collapse of the [insert your favourite company here] share price last year hit me hard. My portfolio value has grown decently over the years, but nowhere near what it would have done, had I simply earned the average market return. Those index-tracking guys might be onto something.”

The SPIVA research conducted by S&P Global is conclusive, as you can see from the US, Japan and South Africa data below. The lesson is to avoid stock-specific risk and invest in the right combination of market-tracking index funds instead. Even the smartest professionals cannot reliably beat the market, so there is no reasonable hope for hobby investors trying this at home.

Getting it right: avoiding the Big 5 unrewarded risks

Investing by its very nature, invites regret. Wherever we put our money, there is always another stock, another portfolio or another strategy that, with hindsight, did better. Some regrets are avoidable though, namely those that relate to taking on unrewarded risks. Most of us are guilty of this, at one time or another. These mistakes usually won’t ruin you, but they will leave you much worse off than you could have been:

1. Inadequate diversification (over-exposing your money to individual investments);

2. Going too conservative on your asset mix (long-term investors putting too much money into defensive, low growth assets);

3. Market timing (deciding when to move money in and out of cash);

4. Manager selection (investing with fund managers who underperform);

5. Over-paying on fees (more than 1% pa).

And now the sales pitch: it’s possible to exclude all these risks simply by investing with 10X Investments and holding on for the long-term. Superior performance and diverse asset allocation are a hallmark of all our funds, our low fees put more money in your pocket, and our highly experienced investment consultants give you peace of mind immediately. Do you future self a favour, and get in touch.