By Angelique Ruzicka, editor, Justmoney
Yachts moored at Cape Town’s V&A Waterfront, lavish apartments in Sandton and bonuses to buy that third German sports car – these are all possibilities if you are an investment manager working for a major fund management firm that charges high fees for taking a guess on what to do with savers’ pension money.
Just this week Steven Nathan, chief executive of 10X Investments pointed out that you could lose as much as 60% of your total retirement returns, over an investment period of forty years if you pay exorbitant fees. “Part of the reason for this situation is the retirement industry itself, which often follows practices that are not optimal in helping South Africans achieve their retirement savings goals.”
While it’s easy to point fingers at the industry though you should ask yourself whether you have played an active role in achieving your retirement goal or whether you’ve sat back and let your financial planner/manager run the show. While they are paid to advise you on your retirement goals, it still means you have to keep a watchful eye on your hard earned savings to ensure you are heading in the right direction.
For that you need a goal and to be frugal about where you invest your money. “An investor needs to understand how big of a pot of money is needed to be set aside in order to ensure a comfortable retirement. A good place to start is to work towards a minimum replacement of 60% of your final salary, or around 10 times your current annual salary,” advises Nathan.
So what should you do to take control of your retirement goals? Here are five questions you need to ask yourself and your financial advisor today:
1. How much do I need to save for my retirement?
Nathan advises that you should ideally save 15% of your salary – starting from their first pay check to their last i.e. a period of 40 years. “For those who have started saving later in life, it is recommended that their retirement contributions are increased,” adds Nathan. “It is equally important to be educated on the various components of retirement saving in order to avoid the common mistakes that many South Africans make, such as paying high fees.”
2. How do the investment fees impact my retirement returns?
Do you know how much you are paying in fees? If not, now is the time to find out. You get charged for advice, administration and investment management every year and this can all add up and erode at your capital.
Nathan says that paying total fees above 1% per annum of your investment balance greatly diminishes the likelihood of you achieving your retirement goal. “There is always a cost to investing, but you need to keep it as low as possible. You should always ensure that you are paying low fees, certainly no more than 1.5% and preferably below 1%. Why? If you can save 1% in fees, your final pension amount would increase by about 30%,” he points out.
A recent National Treasury study found that if consumers could reduce their fees from 2.5% to 0.5% then they would be able to double their final pension or save half the amount to achieve the same pension.
Remember too that actively managed unit trusts (where an asset manager chooses their own share combinations) can deliver great returns but this can be very expensive. Passive unit trusts on the other hand only aim to match market performance and don’t have a manager so they are cheaper.
“Depending on your investment objectives it may be worth considering a combination of both actively managed and passive unit trusts in your portfolio,” says Nico Coetzee, executive: business development and marketing at PPS Investments.
3. Have I made the right choice?
There are tens of thousands of investment products to choose from and with each new fund launched, the choice grows – and so do the chances of making the wrong decision.
Nathan says that it is important to look for an investment solution, in which your investment is linked to your time horizon. Investors should own a High Equity Balanced Fund until they have less than five years to retirement.
If you have less than five years to invest you should reduce your exposure to equities in favour of defensive investments such as cash and bonds, believes Nathan. “This can automatically be achieved using life-stage portfolios. However, if you intend on investing in a living annuity at retirement, you still have a long-term investment horizon and should not necessarily change investments,” he adds.
4. Is my retirement investment product simple and transparent?
The retirement industry is incredibly complex and it can become tricky choosing the right retirement product but it’s up to you to ensure you understand it all or choose a company or advisor that will help educate you.
Make sure that all fees and details related to your retirement investment are easily accessible and that you know what you are paying. “Investors shouldn’t have to be afraid of having to ask their fund manager about any costs that could potentially be reducing their retirement returns,” says Nathan.
5. Is my retirement fund manager under-performing the market?
No matter how smart a fund manager might be, they only have a 20% chance of beating the index when actively managing a fund. Nathan believes that investors will receive superior investment returns (after fees) with less risk using index-tracking funds.
Together with low investment fees, this means a return of as much as 60% more over an investment period of forty years. “The earlier a person starts planning for retirement the better. By knowing more, investors lose less on their retirement,” concludes Nathan.
If you decide to switch funds due to a fund manager’s poor performance make sure you are switching because that poor performance has been constantly bad over a long period. One dive thanks to market volatility should not be enough to make you panic. Take advice from a registered financial advisor if you are uncertain about a fund’s performance.