The current tax year has come and gone, and there are more tax benefits on the way for those who save more, according to the National Treasury. Leigh Köhler, Head of Research at Glacier by Sanlam, looks at how successful investors ensure their retirement years are indeed ‘golden’.
The end of the tax year has come and gone, and many investors took advantage of the tax benefits of making additional contributions to their retirement annuities (RAs). And there are more tax benefits on the way for those who save more. This was the message put forward in the 2013 Budget Speech concerning the National Treasury’s retirement reform proposals. But so much more goes into the planning of a successful retirement than simply making an additional saving once a year.
They start investing early
The earlier you start saving, the earlier compound interest (interest on interest) can start working for you. For each year you delay saving, your monthly contribution will need to be higher in order to achieve the same targeted amount. This will affect your disposable income while you’re still working.
They make additional savings
It’s unlikely that your company pension fund will sustain you over a potential 30-year retirement period. An RA lets you save over the long term as funds invested cannot be accessed before the age of 55. New-generation RAs also allow you to select your underlying investments, with full transparency.
You could even include a personalised share portfolio in your RA investment. An RA also lets you make additional contributions at any time, with no penalties if you stop or reduce monthly payments.
They increase their contributions in line with inflation
Your monthly contribution to your RA will diminish in real terms over time if you don’t adjust your contributions in line with inflation. This will result in your contributing less than you think you are. Investing more, as well as investing slightly more aggressively, could lead to an even higher return over time.
They have exposure to growth assets
In order to keep pace with inflation, you need a certain allocation to growth assets, such as equities, in your portfolio – even after retirement. For those concerned with volatility, there are solutions available that offer downside protection while still allowing you to retain your equity exposure.
You should diversify across asset classes (equities, bonds, property and cash) as well as across asset managers. This should reduce the overall portfolio volatility. There is also a strong case for diversifying internationally as expectations are that global equities will outperform the local market over the next few years. In addition to the diversification benefits, you are protected against the risks of rand depreciation.
They stick to their investment strategy
Generally, investors who’ve consulted a qualified financial adviser and drawn up a diversified, risk-profiled plan, will benefit by sticking to that plan over the long term and not reacting to short-term ‘noise’ in the market. Investors who sell equity investments when the market is down tend to miss out when the market rallies again. Even missing out on a few good days in the market can reduce your returns.
They look after their health
Health and medical care should be prioritised when saving for retirement, as medical costs can form a large percentage of a retiree’s spending. It’s well documented that medical inflation is much higher than general inflation. Nothing is enjoyable without health, so staying active and doing everything you can to stay healthy should be a priority at any age.
They stay active and interested in life
Retirement options aren’t what they used to be. These days retirees are opting to start new businesses and even further their studies. These activities give meaning and purpose to their golden years while allowing them to continue to play a role in the economy. The message is clear – don’t stop planning, working or dreaming.
They consult with a qualified financial adviser
A qualified financial adviser is invaluable in helping you draw up a realistic plan while keeping emotions out of the decision-making process. Certain investment vehicles may be more suited to your individual circumstances than others. An adviser will be able to look holistically at your investment plan, retirement plan and tax situation and advise you accordingly.
They take responsibility
No one said it was going to be easy. But you can do a lot for yourself by taking an active interest in your investments, by reading and keeping up to date with the markets. Products change and sometimes investment views change too. So be informed, ask questions and take control of your future, starting today.