Steven Nathan, CEO of 10X Investments, tells us why saving more and spending less is one New Year’s resolution we should all be sticking to.
Research suggests that most people have abandoned their New Year’s resolutions by the beginning of February. Spending less and saving more is high on the list of proposed lifestyle changes, but here too, most people do not follow through on their good intentions. Yet, this is one area that warrants a sustained commitment because South Africans simply do not save enough.
It is important that savers revise their savings habits as part of their New Year’s resolutions. Fewer than 10% of South Africans can look forward to a decent retirement, according to National Treasury, so greater focus needs to be placed on saving for retirement.
Evaluate your retirement goals
As a start, you must quantify your retirement end-goal: how much money will you need – and how much money do you need to set aside – to give you a comfortable retirement. Track your progress at least once a year to see where you stand relative to your goal.
You can do this with the help of a quality retirement calculator (using accurate inputs and assumptions). This will tell you where you stand relative to your goal, and what you can do to improve your savings outcome. One such calculator can be found on 10X Investments’ website.
Ensure you save enough
You should endeavour to save at least 15% of your monthly salary for approximately 40 years, in order to build a sufficient retirement pot.
If you have started saving later in life, you may have to increase your contribution rate to make up for lost time. Equally important, educate yourself on the key success factors of retirement saving in order to avoid the common mistakes, such as paying high fees or investing too conservatively for your age.
Know what you are spending on fees
Do you know how much you are paying away in fees – for advice, administration and investment management?
Paying total fees above 1% pa of your investment balance greatly diminishes the likelihood you will achieve your retirement goal. So, establish the amount you pay on investment fees every month. The higher the rate, the less you will get out of your savings when you retire. Appreciate that if you save 1% in fees per annum over 40 years, your final pension amount would increase by about 30%.
Ensure your retirement fund is performing
No matter how smart your active retirement fund manager might be, empirically they only have a 20% chance of beating the market return over the long term. By avoiding actively managed funds and using index funds instead, you are able to earn the average market return – no more, but more importantly, also no less.
Invest strategically rather than tactically. Maintaining your age-appropriate asset mix and adhering to the index return protects you from making emotional decisions based on past performance or current market trends. Over time, you will be rewarded with superior investment returns (after fees), with less risk relative to an active strategy. Coupled with low investment fees, you stand to gain as much as 60% more over an investment period of 40 years.
When it comes to retirement investing, it is far more important to eliminate the downside risk and reach your minimum savings goal, than it is to entertain upside risk in the hope of overshooting the savings goal.
Choose a simple and transparent retirement investment product
A simple, transparent solution works in your favour when it comes to retirement investing – it improves your understanding of the fund, it enables you to make informed decisions and it is more cost effective.
Knowing what you pay away in costs and how this impacts on your eventual retirement benefit is critical to your savings success. For many years, South African investors did not fully understand their benefits as the retirement industry (administrators, asset managers, consultants and life assurers) disclosed the bare minimum, in terms of fees and charges.
Fortunately, this is now changing, as the Regulator is forcing service providers to become more transparent. It is incredibly important that you can see all the fees and details related to your retirement investment, so that you can assess and compare products. Do not be afraid to ask your fund manager about any costs that could potentially be reducing your retirement returns. If they have your interests at heart, they will disclose this willingly.
By knowing more, investors lose less on their retirement. In 2015, make it your goal to understand and constantly evaluate your retirement goals and saving plans.
10X Investments (10X) is an authorised financial services provider, a licensed retirement fund administrator and investment manager, which provides a range of simple, effective, low-cost solutions to retirement investors.