The big question here is what retirement means for you? For most it is the thought of not working and enjoying life. The picture of the gentlemen on the beach says it all. (more…)
Not keeping these six investment mistakes into check is like waiting for six massive waves to hit your investment boat at once. As a matter fact, sometimes only one wave is needed for you to lose all your retirement money. Maybe not at once, but gradually over time. Weather the storm by firstly understanding the risks and secondly by protecting yourself by steering your boat wisely through the swells and dips of the unpredictable world of investments.
The six mistakes are:
- Having no idea of your own investment risk profile:
Investment risk is simply stated the level of uncertainty or risk which a person is prepared to take on for an amount of returns from the investment. Daniel Kahneman, who was awarded the Nobel prize in Economics in 2002, did ground breaking work in the psychology of investing. He says that one of the major findings in his studies is that people are not so risk averse as they might think. Kahneman says that people hate losing money more than rejoicing in gaining the same amount of money. We see this for instance when people are very excited when they say that the taxman gave them money back, even though this actually means that they paid too much in the first place. After retirement, you have the conundrum that the investor cannot afford to lose money while at the same time he also needs real growth in order not to outlive his investment. The investor, after retirement, in other words, due to the current life cycle, often has no choice but to investment in a certain way. The solution here is to balance your fear of losing money with the fear of outliving your money. You can achieve this by firstly dealing with your fear on a psychological and emotional level and secondly looking the realty in the eye and planning your investments as well as you can.
2. Taking a too big a drawdown from their investments:
This is the most common mistake retiree’s make. They withdraw too much from their investment with the noble idea that they will make up for it later. Later, never comes! The ideal is not to take more from your investment than the expected growth minus inflation. In other words, if inflation is 5% and the expected growth of your investment is 10%. If gives you 10%-5% = 5%. You should therefore try not to withdraw more than 5% annually. This is low if should your investment be small. There is, a way to beat this – maybe the only way… Work as long you can and do not take any income from your investment. After retirement is your best opportunity to beat the odds. Your health may be such that a well-paid income could be still well within your reach and this will give your retirement basked the opportunity to grow by means of compound interest. Doing the maths, shows that going a mere five years without withdrawing from your retirement, makes a massive difference.
3. Having no life plan:
Money flows in the direction of life choices. That is a fact of life. Therefore, plan your life, understand the cost of your choice of lifestyle and stick to the plan as closely as possible. Doing what you love and loving what you are the surest way to have a quality life. I hear a lot of people about to retire confessing: “I know I have to keep busy.” This usually means living one long vacation. This just isn’t enough. A life plan needs the following to keep you hooked onto life: 1. You need real challenges, 2. you need to experience some meaning, 3. you need close relationships, and 4. you need to enjoy the small things of life. Learn a new skill. Make new friends. Make a difference and make time to smell the roses.0
4. Having no investment plan:
Having no investment plan means that your investment just follows the unpredictable curve of market fluctuations. It boggles me when retirees opt to use only passive investments (which follows the market) to save cost. Then markets of these investments will also use the absence of an advisor as a huge selling point because of the cost saving. This is to plan to have no plan! A good investment plan should include the following: 1. Having clear objectives, 2. Having a portfolio with a mix of defensive and growth investments, 3. Investing not only for growth but also being aware of tax issues and the costs of the investment, 4. Having an investment mix of non-correlating funds – in other words, the investments do not move together.
5. Not minding the investment costs involved:
Costs are very important. The more you pay, the less you have to invest. Costs can be divided into advisory costs and fund manager costs (I include admin and platform fees here). When it comes to advisory fees be sure to negotiate this with your wealth planner. Make sure he/she will be able to explain to you their value-add to justify their fees. Fund manager fees depends on the platform and the choice of investments. Offshore investments for example, often have higher fees than local investments. Furthermore, be careful to invest within a policy structure type of investment, rather go for so-called platform type investments. The latter is usually cheaper and more transparent. The moment when future bonuses and kickbacks are promised it usually means that you will get some of the money you paid into the investment back at a later stage. Why pay it then in the first place?
6. Not planning for tax consequences:
The biggest expense often for the retiree, are taxes. There are three types of taxes to be especially aware of 1. CGT on your investment switches. The trick here is to make sure that you make the right choice of investments from the beginning. 2. Income tax on the income you withdrawal every month. When already retired there is unfortunately not much you can do here. If you have years left before retirement, it helps to have a mix of investments like Unit Trusts, Tax-free Investments and Retirement Annuities (RA). After retirement your RA, pension and provident fund will attract income tax, other investments will attract only tax on interest bearing instruments like money market investments. 3. Estate duty tax could be a problem for those inheriting from you. If all your assets including life policies exceed 3 million rand let your wealth planner do an estate duty analysis for you and provide an estate plan for you.
Finally, in the beginning I said that investing is not complicated, however I could argue that it is confusing. What makes it confusing is the many conflicting messages and the multiple options you have in the market. Therefore, talk to someone you can trust. Not the family friend, but someone you know has a lot of experience. Also, find someone who can truly give you independent advice. Be careful if the person is linked to one insurance company.