You need to understand the risks you face when you save for retirement, Antony Hayes, Gauteng retail marketing manager of Old Mutual, told delegates at the recent Personal Finance/Old Mutual Retire Right seminars.
The younger you are, the more risk you can afford to take. Time is on your side and you should be geared towards making your money grow. As you grow older, you should start locking your money into stable smoothed investments that will preserve capital.
Know the risks
The following risks will influence how your savings will grow:
- Inflation risk:
To fight inflation, you have two options. The first one is to invest early in an inflation-beating portfolio. Remember to diversify. Never put all your money in one kind of investment. Look for investments that have inflation-linked guarantees.
The second is to invest a large portion of your last few salary cheques, because your salary in your last 10 years should be larger than when you first started working.
- Taxation risk:
Taxation changes at retirement could throw out your plan if it was based on after-tax money. However, deferring your tax now means you do not have the certainty of knowing exactly what you have to pay, because tax laws could be different when you retire.
After-tax savings also generate a tax liability. If you save money in anything other than a retirement annuity or pension fund, you could become liable for Capital Gains Tax, in addition to income tax on interest.
- Company or fund risks:
It is very important to know and understand the rules of your retirement fund.
The only way you can lose your retirement savings is if the company that manages the retirement fund has set out to defraud you, or if something happens that is outside of the company's control, such as September 11.
- The risk of investing in the wrong product:
Charges erode the ability of your investment to achieve inflation-beating returns. Avoid buying a product that has too many features that you do not need. You need inflation-linked guarantees and once you have comprehensive life cover, you do not need more.
When looking to invest your savings, remember "if it's too good to be true, then it probably is".
- The risk of choosing the wrong portfolio:
Short-term peace of mind could cost you long-term performance. Your goal is twofold - make sure the money does not diminish and give it a chance to grow.
Remember that the investment professional will be paid first, even if something goes wrong with your investment. If there is a downturn in the share market, your broker is not going to forfeit his fee.
The word "balanced" in a product does not automatically imply that your portfolio is a balanced one.
A balanced portfolio should be one that is invested in a range of investments which perform differently and are affected by different market influences.
- The risk of the market falling:
When you are very close to retirement (five years away and closer), you need to pay close attention to market influences. When you are 10 years and more away from retirement, time is on your side.
Over the past 25 years, the JSE All Share Index has provided investors with a positive annual average return of 22 percent.
Any sector can crash and shares go up and down, but the market will recover, so you need to ride it out.
Don't change to your investment strategy until you get closer to retirement, when your risk profile changes.
- Country risk:
Look at the portion of your earnings that you spend on imported products. That is the portion of your money that you should invest offshore, because that is the amount of offshore inflation to which you are exposed.
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