How Much Is Enough?
Wouldn’t we all like to know the answer to this straight forward question, but how can we make sure you’re are on the right track to sustain your lifestyle in retirement?
There are numerous assumptions contributing towards the answer to this question, the increased life span of individuals and their personal inflation rates are some variables which need to be considered. People must expect to live longer and therefore need more money during retirement.
A study by Allan Gray suggests that in order to produce an income of 75% of your last salary, you would need a lump sum of 17 times your final annual salary (before tax) at retirement day. There are however conflicting rules of thumb depending on the assumptions made. We believe focusing on what can be controlled is key to obtaining a greater degree of certainty along your journey.
Investment vehicle selection is an integral part of the process as, the after tax benefits in the long run, can provide you significant outperformance over time as illustrated by the graph alongside. For example, a balanced fund can return 10.6% before tax, however the same fund invested in different investment vehicles, can provide you with a very different after tax return. We therefore advise our clients to prioritize saving into a retirement annuity to take full advantage of the tax benefits as their main contributor towards retirement savings.
An appropriate asset allocation together with the correct diversification and blend of funds will ensure a more certain outcome at retirement. Risk levels will be assessed over the long term to ensure that you obtain inflation beating returns, which is crucial as, inflation is the major destroyer of capital. The weighting of growth assets in your portfolio will provide your portfolio the best opportunity to obtain these returns. We will make sure that you are exposed to enough growth assets in order to give your portfolio the opportunity to obtain these sort of returns. Throughout the term of your investment, short term fluctuations will occur and the outcome might seem uncertain, however it is important to remember that over the long term, sticking to your investment plan is important and returns will smooth out over time.
Avoid trying to time the market and switching between funds, a well-diversified portfolio will ensure your protection against market volatility, giving you the upside and protecting you from the downside.
Sound independent advice executed according to your investment plan should ensure that you have enough upon and during retirement.