The different stages of retirement planning demand different investment vehicles to achieve your objectives. At the recent Personal Finance/Old Mutual Retire Right seminars, Bryan Hirsch, the managing director of Sasfin Financial Advisory Services, dealt with the growth of retirement savings.
Investing - either directly or indirectly - in shares is the best way to create wealth if you have many years left in which to prepare for retirement.
Bryan Hirsch says investments - such as retirement annuities, savings accounts, life assurance and endowments - give you peace of mind and preserve your lifestyle, but they do not create wealth. And your home is only an investment if it is worth more than it would cost to replace it, he emphasises.
Over 20 years to the end of 1999, the equity market provided an annual rate of return of more than 26 percent, compared to 19 percent in bonds, 13.5 percent in cash and 12 percent in property. Over the same period, inflation has averaged nearly 13 percent, Hirsch says. Over 36 years, the figures are: Equities - 21 percent; bonds - seven percent; cash - 10 percent; and inflation - 10 percent.
So, you would have lost money in real terms (taking inflation into account) if you had been in cash or bonds over the last 36 years. In addition, returns from bonds, cash and property are taxable. At the maximum marginal income tax rate of 42 percent, a return on bonds of 19 percent would give you 11 percent after tax.
Laying a solid investment foundation, Hirsch says, involves:
- Creating real wealth;
- Building your capital and savings;
- Using the power of compound interest - this means starting from the day you get your first pay cheque; and
- Minimising the risk of out-living your capital.
First, he says, you need life assurance - not as an investment, but to protect your family. You need disability insurance and need medical cover. For peace of mind, you also need a cash buffer. Once you have set up all this, though, your best route to wealth creation is the share market. Do not try to "time" the market, Hirsch advises . It is far more difficult than it looks.
For instance, if you had invested in the United States (in shares in the Standard & Poors 500 index) between 1980 and 1989, you would have made a return of 17.5 percent a year. But if you had been out of the market over just the 10 best days, your returns would have dropped to 12.6 percent.
If you missed the 20 best days, your returns would have been 9.3 percent; if you missed the 30 best days, 6.5 percent; and if you lost out on the 40 best days in the close on 2 500 trading days, your returns would have dropped to a paltry 3.9 percent.
The figures are more dramatic over the longer term. Since 1971, you would have made 13 percent a year on shares in the S&P 500, but if you missed the best 18 months, you would have made less than seven percent a year. And if you missed the best 48 months, you would have made ... zero.
In the long term, Hirsch says, you should invest as much as you can in top shares in offshore markets. "Go for offshore markets, go for First World stocks. In the long term, that's where you should be," Hirsch advises.
Equities in the US, for instance, have out-performed cash 64 percent of the time over one year; 82 percent of the time over five years; 85 percent of the time over 10 years; and 100 percent of the time over 20 years. Hirsch's advice: "Get into equities as soon as you can."
The danger of delay
Make the power of compound interest work for you by starting to save for your retirement as soon as possible.
Every year counts, as the table below shows. Depending on the age at which you started investing, these are the amounts you would get at retirement (at the age of 65) from a R100-a-month investment in a retirement annuity, assuming a 15-percent return and 15-percent premium growth each year:
Age next birthday
Value of fund at 65
41R876 076
42R731 287
43R609 350
44R506 788
45R348 323
46R420 628