Andrew Davison of Acsis stressed the importance of taking ownership of your retirement fund and compared it to owning a vehicle. For it to work for you, you need to get in and drive it.
Davison says too few people are actively thinking about their retirement funding decisions.
You should understand the way your employer’s fund works. Find out about the benefits and choices available to you and also consider the risks and costs involved.
Previously, most retirement funds were of the ‘Defined Benefit’ type. This means that if Maurice retired at 65 with an inflation-linked pension benefit of R8 000 per month, he was guaranteed that regular pension for as long as he lived.
But, due to poor investment returns and people living longer, this has resulted in a pension crisis for many of these retirement funds.
Owning your risk
Nowadays, most retirement funds are of the ‘Defined Contribution’ variety. This was driven partly by workers who felt they were more transparent and partly by companies who wished to mitigate the risks posed by their defined benefit obligations.
If Bob, for example, contributes 5% of his salary until he retires at 65, he’ll receive the total value of his contributions plus any investment growth over time as his accumulated retirement savings from which he needs to fund his income in retirement.
Whether Bob lives to 80 or 95 years, he’ll have to make that fixed amount last. Once that pot of money is gone, that’s it. The risk is entirely his.
Bob will have to manage his retirement fund carefully and ensure that the fund value at retirement will be sufficient to provide an income, increasing by around inflation, until his death, or possibly even until the death of his spouse, if she survives him.
Poor planning = poor funds
For many people, inadequate retirement funding is a serious problem. However, most only discover this when they are about to retire. And then it’s too late. A number of factors have combined to create a perfect storm for retirement funding.
Firstly, people are living longer and consequently enjoying a longer retirement. In 1965, the average French retiree lived ten or eleven years beyond retirement. Today, that same person could expect to live another 24 years.
What’s scary is that instead of preparing financially for more ‘golden years’, people are saving less than ever before.
When they do invest their hard-earned money, many people make poor decisions. When the market crashes, they sell out of fear and then buy back at a peak, losing significant portions of their savings in the process.
Aiming for comfort
You can’t afford to be conservative when it comes to investing for your retirement. Life-stage investment plans that put younger members’ money into high-risk investments and older people’s into low-risk ones, don’t necessarily work for everyone.
If you are a risk-averse investor, whatever your age, then you need to be contributing more to your retirement fund to compensate for the fact that your investment growth will be lower.
When it comes to your defined contribution retirement fund, the formula is relatively simple. Your contributions over time plus the investment growth will equal your retirement savings. But how early you start and how long you contribute are also key to a comfortable retirement.