How to keep your nest egg
Ensuring you can retire means keeping your nest egg topped up, writes Wouter Fourie.
|||Pretoria - If you have been saving for the day you retire for most of your life – as any good investor should do – you are probably concerned about keeping your retirement nest eggs safe amidst the current turmoil on global financial markets. If you have been sticking to a well-constructed and tailored financial plan, you shouldn’t be worried too much at this point.
There are a steps you can take to ensure you are able to comfortably enjoy your golden years. It is also important to understand why your specific plan will ensure you the best outcome for your retirement dream.
According to a recent World Bank report, South Africans are the biggest borrowers in the world. 86 percent of all South Africans surveyed borrowed money in 2014. This is why we don’t have enough money saved for that time in your life when you should be taking it easy and living care-free. Only 6 percent of South Africans are able to keep their nest filled with golden eggs. Here’s how:
Monitor your retirement planning monthly
The key to successful long term investments is to determine the building blocks of your investment portfolio and to understand your appetite for risk and be comfortable with this risk.
If your savings are allocated appropriately between different asset classes, and you are contributing to your investment on a monthly basis, your chances of creating a decent nest egg increases substantially.
Long term investors reap rewards in declining markets
When markets are falling as is currently happening, it is normal for long term investors to feel uneasy, especially when they want a comfortable retirement. Remember that you are earning dividends and interest from your existing investments, these dividends and interest are used to buy additional units (these are similar to shares of a company) in your fund at a lower cost.
When markets are performing badly your monthly premium and any distributions of dividends and interest are buying you more units than before, because the price per unit has come down (think of it as buying units cheaply at a ‘sale’). When markets do recover you have more units in your portfolio which increases the growth of your investment portfolio.
We call this Rand cost averaging for long term investors. Experience has taught us this works successfully over time. Markets may be stormy or plain sailing, but if your asset allocation is right, all you need to do is ride out the storm and in the process increase your growth.
Keep emotions in check when investing over the medium-term
You may think that emotions only come into play when investing for the long term, but they can also wreak havoc in medium-term investments of between 3 and 6 years. Here you need a financial plan with a balanced asset allocation, in other words spread your funds equally among different investment baskets.
Many people neglect medium-term saving, which often results in these goals being financed using debt. Saving for medium term goals prevents going into debt and at the same time creates growth opportunities that are better than saving in a money market.
A great way to achieve this is to have a larger basket dedicated to government and corporate bonds and interest-bearing instruments.
Making sense of investment terms for pensioners
The wise pensioner’s plan includes a combination of long, medium and short term investments. You want to enjoy the safety of short-term investment but also want to realise the benefits of long-term growth. Remember your retirement goal – to ensure you have enough funds to last you throughout your retirement.
A way of ensuring the potential for growth is to watch the amount of units in your unit trust investment closely. As long the amount of units remain constant or increase year on year, you are safe. If these units decrease along with the market value of your portfolio, you run the risk of using to too much capital and can run out of income in the long run.
Wouter Fourie is MD of Ascor Independent Wealth Managers and the 2015 FPI Financial Planner of the Year.
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