Many South Africans plan to retire as early in life as possible, but the reality is that most cannot afford to retire as early as they’d like. Perhaps it should be a wake-up call that you are responsible for your own retirement plan and if you’re not on track, perhaps best to act sooner rather than later.
How can you take charge of your retirement plan?
SAVE, SAVE, SAVE….
The first step is to determine whether you are saving enough capital on a yearly basis. So, if you were to retire at your planned retirement date, how long would your capital last if you were to draw your required income? If your capital will not last very long, it is a sign that more money should be saved on a yearly basis. Drawing a financial roadmap is a great way of visually planning your retirement.
Monitor your investment performance:
Markets move in cycles, so investment performances will vary each year and are sometimes not as pleasant as expected. However, if your portfolio is not performing over a longer period such as three to five years, you should be asking why. A good way to measure your performance is against South Africa’s annual inflation target of 6%, and if your portfolio is not beating inflation comfortably over longer periods after costs, then it should be a serious concern for you. Investment advisors should be able to construct suitable portfolios that aim to beat multiple benchmarks on a client-specific level. It is recommended that your portfolio is constructed to best suit your long-term objectives. Investing in money market is no longer the safe place to be in a high inflation environment – your wealth will erode in real terms.
Invest in growth assets:
Over long periods of time, riskier asset classes such as equities have outperformed inflation at a comfortable level. To grow your wealth, you need to have a suitable allocation to equities, both locally and internationally. Growth asset classes do carry more risk and do expose your portfolio to market volatility, and it is best to take a long-term view when measuring performance.
The below graph is an illustration of how a more aggressive portfolio outperforms conservatively structured portfolios as well as beating inflation (CPI) over the long term:
- Conservative portfolio:
- The below portfolio comprises mainly income and balanced funds. Although beating inflation, it is not by a large percentage
- Aggressive portfolio
- The below portfolio comprises mainly balanced funds and equity concentrated funds, with a higher allocation to equities both locally and internationally. The portfolio aims to beat inflation by a much larger percentage over the long term.
Ensure that your portfolio is well-diversified:
Diversification benefits are well noticed when markets suffer a downside swing. This was very evident in March 2020 because of the Covid-19 crisis and the swift negative impact it had on markets. Diversifying a portfolio means not investing all your capital in the same asset class. A well-diversified portfolio will be constructed to include exposure to multiple asset classes as well as over various geographic locations.
The below graph illustrates how a diversified portfolio offers more protection to your wealth in a downside market cycle (seen in March 2020), as well as outperforms the benchmark on the upside:
Taking charge of your retirement is the first step to enhancing your chances of a successful retirement. It is also recommended that your retirement plan is reviewed regularly and adjusted as circumstances and market conditions change. It could be a daunting task for some and navigating through the challenges and investment solutions is best done with the assistance of an investment advisor.