We can’t see into the future, but we can save for it. A retirement annuity (RA) is a retirement savings product with benefits and restrictions that will help you towards your goal of having money to live on once you’ve retired.
Avoid the following mistakes in order to achieve your goals and be financially independent so that you can enjoy your retirement years.
Thinking you’ve run out of time to invest
When you’re employed and know you’ll be receiving a salary at the end of every month, it’s easy to become complacent and delay investing for retirement because ‘there’s always tomorrow’. It’s only towards the end of careers that many people realise that they may not have enough money for retirement. Often they panic and do nothing. Don’t worry, you still have time to save.
Take a look at your current financial situation and based on that, decide on your financial goals, and act accordingly. It’s worth consulting a financial advisor if you’re struggling to iron out a comprehensive plan.
If you’re in your late thirties or early forties, it’s a good idea to start saving by cutting back on expenses that aren’t necessities and invest the difference into a retirement annuity.
Playing it too conservatively
It may not be in your best interests to invest too conservatively – even if you are nearing retirement. It’s important that your retirement portfolio is structured for growth.
While they can be more susceptible to fluctuation, equities, over the long term, have outperformed other asset classes. It’s therefore worth considering that your portfolio has a generous amount of equity exposure.
South African retirement fund regulations allow you to invest up to 75% in equities. If you are don’t want to build your own portfolio you could consider a balanced fund. These funds can invest up to 75% in equities; the remaining 25% can be invested in other asset classes such as property; cash and offshore investments. This reduces volatility and diversifies risk.
Confining yourself to one asset class
Diversification of your retirement portfolio can help you reduce risk. By investing in a variety of assets, your returns will come from a number of different sources, irrespective of the market conditions. As mentioned above, a balanced fund is worth bearing in mind because it affords investors the opportunity to investment in a number of asset classes and therefore ensuring a steady return.
Market volatility may tempt you to sell and buy another unit trust – this is called switching. Emotional responses to dips in performance can damage the value of your investment, hindering achievement of your retirement investment goals.
Rather, speak to your financial advisor before making a decision based on the performance of your investment. It’s best to consider making changes to your portfolio if a change in personal circumstances affects your financial objectives.
Accessing money too soon
Many South Africans tend to take a cash payout when they gain access to the money on retirement. This can actually harm the accumulated savings more than you think. By not preserving your retirement savings, you’re not going to extract the full potential of compound interest.