The 4 golden rules for a successful retirement

Without a proper retirement savings plan, most South Africans will not be able to sustain their accustomed living standard in retirement.

Steven Nathan, CEO of 10X Investments, is particularly concerned about the current generation of people entering the job market. “The Millennial Generation has a different outlook on life, which often manifests in worse savings habits than previous generations. Ideally, people should start saving for retirement from their first pay cheque but few follow this advice.”

People may well work longer in the future, but they will still have to retire at some point, so it is important to plan for this, says Nathan. For individuals, a retirement annuity fund is the optimal way to save, as this presents significant tax benefits. For an optimal outcome, he advocates you follow these 4 golden retirement rules:

Rule 1: Save 15% of your salary

Nathan recommends that all employees save at least 15% of income towards their retirement. “So, for every R100 of your gross salary, you should put away R15 towards retirement. 15% may seem like a great deal of money, especially if you have started your job, but fortunately you can deduct your contributions for tax so the impact on your take-home pay is less. If you learn to live within this income from the beginning, it will make it that much easier to keep the habit later on.”

Rule 2: Save hard…and long

Nathan says that while saving 15% of your total earnings is critical, this alone isn’t enough. “It’s not just about how much you save, but also for how long you save. Time plays a big role in determining how much you will have saved at retirement. The effect of compounding (earning a return on the return) becomes more pronounced the longer the savings period.”

You should therefore start saving as early as possible. Also avoid the temptation to cash in when you change jobs, as this will severely dent your nest egg at retirement. 

Rule 3: Minimise fees

Nathan explains that whereas the future return on your investment is uncertain, the investment fees you pay are not. “Fees are the one aspect of your future investment return that you can control. It is very important that you know how much you are paying for advice, administration and investment management. Ideally, you should never pay more than 1% per annum of the total investment value in fees.” 

He says that paying more will significantly reduce your retirement income. “If investors can save 1% pa in fees over the long-term then their final pension value will increase by some 30%.”

Nathan warns that paying a fee of 3% pa over 40 years will halve the value of your pension and ruin your retirement. So keep your fees low by shopping around for a low cost provider.

Rule 4: Invest for growth with a high equity balanced portfolio

To grow your wealth, you must earn a return higher than inflation. With cash, your return barely matches inflation. Company shares, on the other hand, such as those listed on the Johannesburg Stock Exchange, have delivered a return that is much higher than inflation – over the long term. As a long term investor (between 10 and 40 years) you should therefore choose a portfolio that invests mainly in shares.

“It is important that investors have 75% invested in growth assets, such as listed shares and property, if the goal is to generate a return of between 5% and 6% per year above inflation,” says Nathan.

While the return from such investments can be volatile in the short term, long-term investors have time on their side to ride this out.  Nathan recommends that you ignore market movements, gloomy headlines and commentators who base their strategy on recent events. “Investors should avoid rear-view mirror investing. As a retirement investor, your goal is to maximise your long-term return. Reacting to or trying to pre-empt market volatility - which is inherently unpredictable – will most likely result in a lower return.”

However, you must diversify your investments. This protects you from being overly exposed to a poorly performing market, asset class or security, to the detriment of your long-term savings outcome. “Diversification, coupled with re-balancing, locks in your gains on investments that have done well and adds to investments that have underperformed,” say Nathan.

You should therefore choose an investment portfolio that includes different asset classes (equities, bonds, property and cash), each providing exposure to many different underlying securities, held across different currencies (local and international) and regions (e.g. developed and emerging countries). While most professionally-managed balanced funds are adequately diversified, Nathan warns investors who ‘do their own thing’ that they may fall short.

“It is important that investors understand that they are responsible for their own retirement. The more an investor knows about how to maximise their retirement fund savings, the more comfortable their retirement will be,” concludes Nathan.