Advice on Planning for Retirement

We believe that successfully meeting your long-term investment goals should not be a matter of luck!

A sensible and well-informed investment approach will always reap long-term rewards. Here are 11 sound pieces of advice that we believe every personal investor should heed.

Visit our Learning Centre for more discussion on your investment planning and unit trusts.

1. Take Responsibility for Your Own Wealth.

Taking responsibility means that you need to know how much you should save/invest and being pro-active to ensure that your investment portfolio achieves adequate returns to meet your financial security and retirement needs. This does not mean that you need to be an expert on every aspect of planning and investing, although being better informed is likely to increase your sense of security. No one cares as much about your financial security as you do. Being responsible includes deciding on which asset classes you ought to invest in and ensuring that the people entrusted to look after those investments are performing (while not charging you excessive fees).

In order to take responsibility you need information (product information and the performance of your investments) and the means to carry out your investment decisions. We believe that Equinox.co.za provides this. Our product range will expand to include retirement products and wrap funds.

2. Understand How Much You Need To Save

How much will you need at retirement to live comfortably? Bear in mind that "Save" includes additional amounts used to repay interest bearing debt. Our Retirement Planner will help you assess this.

3. Assess Your Assets and Liabilities

What kind of growth do you expect from your assets? Can you afford very appealing large investments, such as a holiday home, that may yield relatively low returns? And what about that dream car? The monthly repayments you make on an expensive car do not contribute in any way to your future wealth. Perhaps you should rather invest that money - and reward yourself after some years of good returns when you can actually afford the car?

4. Pay Off Your Interest Bearing Debt First

If your bond rate is 10%, any investment has to go up at least 10% per annum after tax in order to justify not selling the asset to pay off the bond. It is generally not a good idea to have any money market deposits, shares or unit trusts until your interest bearing debt has been repaid. While shares and unit trusts can increase by more than 10% a year, this is not certain. You will be reducing your risk profile and increasing your long term returns (after adjusting for tax and risk) by paying off your debt. It is even more important that any credit card debt or overdraft is paid off owing to the higher rates of interest. As an interim step, consider combining them with your home loan, which carries a lower rate of interest.

5. Assess Your Retirement Savings

Your pension fund often accounts for a major part of your planned retirement assets and income. Despite its importance, most people know very little about it (who the manager is, the performance of the fund, the fees charged, whether brokers were/are used and what their fees are). With the switch from defined benefit to defined contribution, you have both the right and the responsibility to have a say in the management of your pension assets.

Most people are shocked when they realise how poor their pension fund investment performance has been and how high the various fees are. If you are dissatisfied, investigate the alternatives to your current pension fund. In view of the generally poor level of disclosure, poor performance, high fees and lack of control that you have over your pension, Equinox.co.za is considering offering an alternative in the future.

6. Don't Be Sold!

"Investment products are sold, not purchased" is regarded as a truism in the investment and retirement industry. This means that brokers and financial advisors assume that you need to be persuaded to buy a product (on which they earn commission) rather than you deciding what you need and then finding the best provider for that product or service. Unfortunately, this often means that you buy a product that suits the broker, not you. As an example, if a broker sells you a 30 year life product, he receives up to 85% of your premiums in the first year. Should you need access to you money before 30 years, the surrender penalties are very high. We recommend that once you have established what you need to invest, that YOU decide what kind of investments suit you.

7. Financial Advisors

We believe that it is often a good idea to use a financial advisor to personally assess your financial needs and guide you towards appropriate investments. HOWEVER, use a reputable, appropriately qualified advisor that preferably charges by the hour. A financial advisor charging by the hour is far more likely to give you impartial advice that is in your best interests than a broker chasing commissions.

8. Favour Growth Assets

Have another look at the graph on the effects of compounding as well as the bar chart on the returns produced by different asset classes over time. Assuming a money market rate of 10.% and a tax rate of 40%, the after tax yield would be 6%. A rough estimate of average equity returns over the next 25 years would be 10.5% (GDP growth plus inflation). While the differential of 4.5% may not seem much, the effect over 25 years is very significant. A R10,000 investment in the money market would be worth R33864 while it would be worth R108347 in the equity market, i.e. more than three times as much.

Many financial journalists and financial advisors advocate that retirees (and those approaching retirement) not take any financial risk, i.e. they should put all their money in the money market and not invest in shares. Given that an increasing number of retirees will live another 30 years, we believe that this advice is no longer appropriate. If you are then using all the interest to live off, this interest will steadily decline in what it can buy over time. It is essential that at least some of your assets grow in order to keep up with the effects of inflation.

Certainly equities have performed relatively poorly over periods of time. Equities are certainly higher risk and periods of under performance should be expected. However, over periods of five and ten years equities have generally outperformed all other asset classes. This implies that under performance increases the chances that the market will do relatively well in the following periods.

9. Investment Decisions

Many people would like to stay involved and informed but do not want to do the actual share picking. Unit trusts are the natural starting point for such people. They can then either make their own decision on which unit trusts to invest in or use a wrap fund (in which case the wrap fund manager will decide which unit trusts to invest in).

10. Tax Planning

Tax can have a significant effect on investment returns over time. Interest is taxable as is trading in shares. In order to avoid paying tax on share profits requires holding the shares for long periods, typically five years or more. In these volatile times, five years can be a very long time in the life of a share. It is the current practice of the Receiver of Revenue to not tax the equity component of equity unit trusts. Until this changes (it may never change), unit trusts are a very tax effective investment mechanism. The tax implications and benefits of the various retirement products are set out below.

11. The Effects of Fees

Fees are usually charged both when you make an investment as well as an ongoing annual fee. These fees are often high and can have a very detrimental effect on investment returns. The fees can be particularly high in the case of some of the retirement and pension products (fees of up to 7% on an annual basis are not infrequent on small pension funds). Having one or more brokers involved accounts for a large proportion of the fees charged. The retirement and insurance industry is under increasing pressure to disclose their fees.

Equinox.co.za is committed to complete transparency in its fees. Please refer to the section on FEES for our fees as well as a comparison with our competitors.