indwe magazine – Dec 2005

Planning Your Retirement Itinerary
Exploring the Options
A mistake that many make is assuming that their pension or provident fund will more than suffice after retirement. Sadly however, this is seldom the case and these funds will probably only provide about two thirds of current income! It is thus essential that you recognise the possibility that your capital build up at retirement is likely to be insufficient.
Some alarming retirement statistics showing the financial position of retired people in South Africa:
Forced to continue working: 31%
Depend on state pension: 16%
Depend on family: 47%
Financially independent: 6%
Book Early!
You’ve heard the old saying “it’s never too early to start”! Unfortunately though, it’s part of human nature to ignore some of the warning calls given in favour of the old “we need to make our own mistakes to learn” excuse. But in this case, taking heed may be the best decision you ever make if you consider that, in order to attain the same retirement benefit at age 55, a 25 year old needs to invest approximately 5.9% of salary each month, a 35 year old 17.5% and a 45 year old a whopping 64.8% of each month’s salary for the next ten years. Not exactly possible for most!
Accumulate Your Travel Miles
Investing early allows you to take advantage of compound interest, which internationally renowned investment guru, Warren Buffett, refers to as being the eighth wonder of the world. To demonstrate, say you are 25 years old, and you invest R10,000 in a unit trust fund that returns 10% a year on average. Your best friend, who is the same age as you, invests R10,000 in the same unit trust fund five years later, at the age of 30. By the time you both retire at age 65, your investment would be worth approximately R452,600. Your friend’s investment, however, will be worth only R281,000. Your investment period was less than 15% longer, but your final portfolio value ended up being more than 60% larger!
Did you check that you got a window seat when booking your ticket?
Your ticket to a comfortable retirement involves several aspects of careful planning, but starts with a good strategy! Work out how much money you’ll need for a comfy retirement, and then project whether you’ll have enough to meet those needs at your present savings rate. Once retired, rather find yourself staring out the window enjoying the view than being stuck in an aisle seat being battered by the flight attendant’s food cart each time it whizzes past.
A well trained pilot is more likely to get you to your destination safely!
It is advisable that you select a reputable financial planner who will not only give you good initial advice, but will also help you select the correct underlying investment and investment vehicle to suit your needs, as well as prudently and effectively manage these investments, so as to optimise your ultimate retirement benefits.
Keep checking the radar screen
A pilot will not reach his destination unless he checks his coordinates at regular intervals. Similarly, your retirement strategy will only work if you revise it regularly, adjusting your investment portfolio as and when your circumstances and risk profile change. Failure to do this could mean rather depressing surprises at retirement. Most new generation investments (including retirement and living annuities) allow flexibility of underlying investment options for investors, under the correct guidance, to effectively manage the underlying assets.
How well do you Handle the Turbulence?
Different investors have different risk appetites. The more conservative investor (usually someone who is older or hasn’t got excessive savings built up) is more suited to fixed interest investments such as bonds and money market whereas the more aggressive investor, more able to tolerate the short term turbulence of the stock market, is better suited to a larger allocation in the share (equity) market. Understanding your risk profile is one of the most important elements of establishing your investment strategy as well as ensuring that your investments remain in line with this strategy by re-balancing the underlying investments on an ongoing basis. After a run in the stock market, a medium risk investor’s investment portfolio can easily become an aggressive one just from the growth of the equity element. Failing to re-balance this portfolio will result in increasing its overall volatility and put the gains made at risk.
First Class or Economy?
The law requires that any portion of retirement funds not taken as a lump sum at retirement need to be invested into a compulsory annuity. As a result, it is essential that the investor entering into the contract operates with caution and prudence and examines all available options, as the investment will apply to the entire period after retirement. Incorrect decisions made at the outset are often difficult if not impossible to reverse at a later stage, and never mind economy, may see you travelling in cargo!
There are two types of compulsory annuities, the conventional life annuity and the investment linked living annuity. Although the conventional life annuity still has a place in the market, it also has severe drawbacks that make living annuities far better options for many investors. Among these drawbacks is the fact that on the death of the annuitant, the payment of the annuity ceases, and the capital remaining in the underlying asset portfolio is forfeited to the life insurer, leaving nothing for dependants. Living annuities allow perpetuity of the investment and a well managed portfolio could provide an income to several generations to follow! In addition, the living annuity allows for active management of the underlying funds.
The investment is not without risks however as many incorrectly risk-profiled living annuity owners are already aware. Never be tempted to invest on the basis of past performance rather than suitability and future potential and always ensure a diversified investment portfolio. Had these all-important rules been followed, many investors out there would be in a much more positive position, truly enjoying the real benefits of a well managed living annuity. If you are concerned about your living annuity, we would certainly suggest that you contact a credible financial planner as soon as possible to protect your wealth and future income.
So, good luck, enjoy your flight and don’t forget to take this complimentary magazine with you to help when you sit down to do some retirement strategising.
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