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By Suzean Haumann*
Saving for retirement is a key focus of astute investors and it remains an important goal considering the expected longer lifespans and how long invested funds need to cover retirement expenses. Planning this investment while earning an income, to ensure you have enough saved to live on during retirement, requires careful planning. Planning for retirement should start in your 20s – from the first income earned – and change with every life stage after that. Consider these tips on how to invest during each of these stages.
Firstly, one must understand the different asset classes and what role each plays within the investment:
Conservative/defensive assets, like cash, bonds and fixed interest investments are low risk but also lower reward or growth potential and are not advisable long-term investment options. Equities and property are growth assets which are more aggressive but over the long-term will yield better returns.
These asset classes all behave differently during different market cycles and over different years, both local and globally. Refer to the below graph depicting these asset classes over a 20-year term. You can have a top performer over one year (listed property) but if you look at three and five years, it is still in negative return territory. Devising a diversified portfolio is therefore especially important.
Normally when economies are doing well investors move from cash and bonds to equity portfolios, and the reverse happens when economies are struggling – more investors tend to invest in low-risk conservative assets. It is, however, counterproductive to sell low and buy high during any economic cycle and investors should be careful not to make emotional decisions when they are scared.
Retirement Planning in your 20s:
Starting out with your employment you are probably still paying off student loans. It is however particularly important that you start investing and saving with anything you can afford, you have the best asset on your side – TIME. You can absorb any market volatility better now than closer to your retirement. It is important that you start an emergency fund (at least 3 months’ gross salary) to ensure you don’t have to go into credit in the event of an emergency. Besides saving it is also important to think about life insurance while you are still young. Something like critical illness cover and income protector cover is important and is normally less expensive when you are younger. It is also advisable that you invest any funds available once those goals are covered in a high equity portfolio and a small portion in cash and bonds.
Retirement planning in your 30s:
If you have not started saving for retirement you are not too late, but you will probably have to save more to make up for “lost time”. You can still reap the benefits of compounding growth until you retire. You will probably now pay of mortgage loans and starting a family, but retirement planning should remain a top priority for you at this stage. Keep debt, especially short-term debt like credit cards, as low as possible. Your portfolio should be allocated to high equity exposure, but more cautious assets should also form part of your planning.
Retirement planning in your 40s:
If you haven’t started saving yet now is the time you have to focus and save as much as you can. You are most likely approaching your highest earning potential and additional savings such as bonusses should be added to your retirement savings. If you have started in your 20s or 30s attention should be given to the structure of your portfolio and ensuring that you maximize your portfolio building.
Your retirement savings should remain a key priority, but in all likelihood, you will also have to focus on saving for your children’s tertiary education and paying off a mortgage loan.
Your portfolio will still be aggressively positioned to give you the optimal opportunity to have inflation-beating returns. Don’t take unnecessary financial risks, it is very important that you speak to a financial adviser to ensure you are staying on the right track. Avoid investments that sound “too good to be true” as they normally are, and you can’t afford to lose all your savings at this stage.
Retirement planning in your 50s and going into your 60s:
You are nearing your final salary earning years. Now is the time to consider the current portfolio and ensure that you reduce high volatility equities and move to equities that are slightly less risky. Keep in mind that you won’t stop investing in retirement, but that you can’t take unprecedented risks either.
It is advisable to ensure you have settled all your debts by now to limit these payments when you retire. It is also a good time to sit down and decide on when you actually will retire and discuss this with your financial adviser to ensure you are on the right path with what you have vs what you need. A good split for your portfolio at this point is a more moderate-aggressive approach with a good chunk in equity allocation (50%-60%) for long-term growth generating moving into retirement.
Retirement is here… enjoy:
You are now retired, and your focus is now on drawing down on your investments for income purposes. Changing your portfolio to only cash is not wise and you should always have a diversified portfolio to ensure that your assets are correctly positioned for different market cycles over the years to come. A moderate portfolio is generally a good allocation in this stage of your life.
Always remember failing to plan is planning to fail. Speak to a professional adviser to assist with financial planning.
- Suzean Haumann, CFP® professional, is Head of Brenthurst Wealth Tygervalley.