“BANK PAYS FOR ADVISER’S SCAM.”
“GOVERNMENT TO OVERHAUL PENSION INDUSTRY.”
“BE THE MINORITY THAT CAN AFFORD TO RETIRE.”
Week after week these headlines appear in the press. We read reports of dishonest advisers, regulatory changes, high fees on retirement products and the unaffordability of retirement. While I do not doubt the validity of these reports, they tend to focus on the negative aspects of retirement savings.
Negative news and sensation sells newspapers. The awards for the best financial journalists often go to the ones who have dug up the biggest scandals. Educational articles are often boring and repetitive. Just think about it. Have you ever read a headline entitled: “Steady saving helps couple to retire.” What’s more, financial news channels have turned financial data into entertainment. Around the clock, financial news stations create the impression that ordinary people need to be in touch with their money. Every day, endless streams of experts appear on TV and radio, informing ordinary people what they should do with their money, often with conflicting advice from minute to minute.
I have also seen ‘experts’ advise ordinary people to take extraordinary risks with their retirement savings. For example, a while ago an article suggested that investing in agricultural derivatives might be a good solution to retirement savings. Another one suggested five stocks as enough diversification for a retirement portfolio. I have seen advice that suggests buying your own business or buy-to-let properties are the only options to save enough for retirement.
I suspect that for many the notion of retirement savings is fraught with danger. I suspect that many ordinary people think that they simply do not have what it takes to save for retirement. I suspect that many do not even bother. If I put myself in their shoes, I might have given up too.
Don’t get me wrong. The financial industry is guilty of many practices that have wounded people’s ability to retire comfortably. Industry change was necessary and is still necessary. That said, the whole industry is not entirely rotten. For every one financial adviser who is guilty of transgression, there are hundreds who are honest and who have helped people to successfully retire.
Fortunately, all is not lost. I recently met with three couples who used ordinary retirement vehicles and old-fashioned unit trusts to save enough money for very comfortable retirements. Once again it reminded me that saving for retirement is not rocket science. It also reminded me that there are a few basic (but boring) principles for retiring well. I think it might a good reminder to us all, advisers and clients alike.
Mr and Mrs Entrepreneur started their own business 20 years ago. When Mr Entrepreneur resigned from his job, he preserved his accumulated pension in a preservation fund. When his business started to earn enough money to pay him a salary, he contacted a financial adviser who sold him a retirement annuity. Soon after, his wife joined him in the business. She also preserved her pension and started saving in a retirement annuity.
As they earned more, they increased their retirement annuity contributions. In their fifties they also contributed regularly to unit trusts, always maintaining a balanced exposure to different asset classes in their overall portfolio.
When I met with Mr and Mrs Entrepreneur, they had accumulated enough money to retire comfortably and travel extensively after their retirement. I was interested to see that although there were a few advisers involved over the years, all of them had recommended well-diversified investment portfolios, which stood the couple in good stead.
Mrs Steady has worked for the same large company for the past 20 years. She is now approaching retirement. She diligently contributed to her pension fund for all those years. In addition, she also contributed to retirement annuities to ensure that she utilised the maximum tax benefit every year. Over the years, Mrs Steady was also advised to invest in endowments and unit trusts.
Although she was fortunate enough to inherit some money from her mum, she would have been able to retire comfortably even without this inheritance. Once again, I was impressed by the balanced nature of her investment portfolio. She will now not only be able to retire at 60, but will also fulfill her dream of travelling extensively during retirement.
Mr and Mrs Independent took a slightly different route, but with equally impressive results. Ten years ago, Mr Independent realised that he was paying high fees on particularly opaque savings products. He made a decision to cash in these products and to rather invest in a more transparent and independent way. Although Mr Independent retained his preservation funds, from his previous employment, he contacted a stockbroker and started a share portfolio.
Even though he allowed the portfolio manager at the broking firm to manage the portfolio, he kept in close contact, ensuring that he fully understood the rationale for the transactions and often initiated changes in the portfolio. Over the years, they built up a large portfolio of quality shares. The couple is now ready to retire. They will benefit from the portfolio’s dividend income, as well as the income from their retirement savings. They will be able to help their grown-up kids further their education, put down deposits on their first properties and pay for future wedding expenses. They will also be able to afford a comfortable retirement.
All of these people managed to educate their children. They did not indulge them with expensive lifestyles, although they are now in the position to help them financially.
These three stories illustrate that ordinary working people can save for retirement. There are seven keys hidden in these stories:
1. Saving is a discipline, fashioned over a long period of time. Put the power of compounding on your side.
2. All of these clients had modest lifestyles, which enabled them to save.
3. Saving in expensive vehicles is better than not saving at all. Although cheaper retirement options are available now, this was not always the case. These days it is possible to closely monitor the costs of retirement vehicles and everyone should.
4. Preserving pension fund benefits contributes significantly to a successful retirement. It not only preserves tax benefits in your savings, but also allows the capital to benefit from years of compounding. I fully support the government’s initiatives to make preservation compulsory.
5. A diversified portfolio improves the investor’s experience over the years and helps them to stick with the initial plan. I have seen single sector funds in retirement vehicles destroy the faith of the investor, in the retirement vehicle itself. I believe that forcing investors to stick with Regulation 28, in retirement vehicles, will only increase the likelihood that more people will retire comfortably.
6. Utilising the tax advantages of retirement vehicles also puts the power of compounding on your side and helps you to save more over time.
7. Having both discretionary and retirement savings provides investors with flexibility – it provides the best of both worlds. It also sets up retirees with more than one income stream and protects against regulatory changes.
Contrary to the picture painted out there, it is possible to retire successfully.
August, 2012 / Sunél Veldtman / INVESTSA