In this financial planning column, Andró Griessel, CFP® and managing director of ProVérte Wealth & Risk Management, answers a reader’s question about drafting a retirement plan.
Q: I need someone to assist me with an investment strategy. My wife and I are both 37 years old this year. We are professionals with sufficient income levels to live comfortably and provide well for our two boys, ages four and one. We both started new jobs recently and we have some additional disposable income that we need to put away in addition to our employer pension fund contributions.
We don’t have other investments or capital besides a cash amount equivalent to our combined net salaries of roughly three months.
Could someone please assist in setting up a retirement plan for us?
A: Retirement planning is only one component of a holistic financial plan and although retirement has a higher probability than all the other risk areas (like the financial impact of the death of a spouse, the loss of income due to disability, incurring large medical bills due to sickness or accident or the financial implications of divorce), THIS is the area (barring maybe divorce) we find people being the worst prepared for.
Planning for retirement is much like planning a flight in a light aircraft from point A to point B. Before you embark on this journey you have to check if your aircraft is in a condition to make this trip, that you have enough fuel in your tank and what the weather conditions will be on your way.
This process can be compared to going to see a financial adviser and doing the maths or doing it yourself if you have the skills. This is not enough though… as you fly the plane en route to your destination, things might and will change. These things can be anything from weather to the mechanics of your aircraft and some of these changes might have life-changing implications. Planning for retirement is exactly the same. You have to constantly measure your progress and adjust your plan if the conditions or events require you to do so. Setting up a retirement plan is therefore in my view only the first couple of steps in a long journey.
I know I know… this is all a bit fluffy and I’m not answering your question. Unfortunately I don’t have enough information to assist you with the actual plan and would advise you to seek a long-term engagement with a competent adviser to assist you on this path. Because not all advisers are created equal, and the competency levels (and dare I say integrity levels) vary from extremely competent and professional to almost criminal, I will give you a couple of pointers from our experience.
- If you plan on retiring at 65 you have another 28 years to work. That is a long time and errors in assumptions play havoc with the numbers over such long periods. Therefore, err on the side of caution with your assumptions about life expectancy (longer rather than shorter), retirement age (not later than 65 or your company policy), inflation rate (CPI is too low in my view) and expected returns (use very long term historic numbers and adjust downwards).
- Be specific in your goals. For example, when you draw up a flight plan you don’t plan to land in the greater Bloemfontein area, you plan to land on Runway 02 at the Bram Fischer International Airport. Spend time on what it is you want your life to be like at retirement and plan to reach these goals. Remember though that this plan will need adjusting as you go along with a lot of the bigger adjustments happening up front.
- Be sure you match your tolerance for risk with your investment strategy. Bad outcomes are often not the result of bad long-term performance of the investment but because of the investor’s reaction to short term volatility.
- Cost is a drag so be cognisant of it. There are generally three types of fees on an investment ie fund manager fees, platform administration fees and adviser fees. Make sure you are comfortable that each fee taker is worth their fee by looking at the value proposition of each.
- After five years, start using actual money weighted returns instead of projections. There is no sense in projecting at 12% if your actual return over the past five years was 8%. Some interpretation of the period in question and subsequent returns (good or bad) is obviously required. If the adviser looks puzzled when you ask for your actual money weighted return after fees… RUN.
- Ask the adviser to show you the impact of different average growth rates as well as different retirement dates to understand the profound impact changes to these has on your plan. Extending your retirement age from 60 to 65 for example can completely wipe out a big shortfall. Remember that there are many levers to pull to reach your goals if you come up short at the moment. Increased contributions are only one of them. If the adviser doesn’t talk about options other than significantly increasing your contribution… RUN.
- Think holistically about your planning. If you and your wife are already contributing to your employer schemes (and are therefore restricted to Regulation 28), I would suggest you consider direct shares, unit trusts or property as an alternative investment, if it suits your tolerance for risk/volatility. You would do well to take note of the geographical allocation of your investment too. We find most people’s portfolios are very badly diversified from a geographical perspective.
Most important, monitor your progress at least once a year. Not checking your course or losing track of where you are can get you killed in aviation… it’s not much different in retirement planning.
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