Some simple steps to follow to get your retirement savings started.
Don’t despair - while saving for retirement may seem tough at first, it gets easier once you are in the habit. And the good news is you won’t regret it: the decisions you make today will have the greatest impact on the quality of your lifestyle once you retire.
While you may feel you don’t have room in your current budget to accommodate saving for retirement, small financial sacrifices can help. It may be easier to make space for retirement savings than you have anticipated.
1. Assess your spending habits
Start with a reality check: keep a running total of everything you spend in a given month. Write down every item from your morning coffee to that late-night takeaway. You may find you are spending too much on items you don’t really need.
Consider this: it costs more to have a monthly DSTV subscription than most minimum monthly contributions towards a retirement annuity or a unit trust investment - many financial services companies, including Allan Gray, offer investment minimums of just R500 per month.
2. Create a budget
Once you have an idea of where your money is going and where you can potentially cut back, draw up a budget. This will help you to understand how much of your income needs to go to fixed expenses and how much is left to play with. Next you need to think about your spending priorities. It’s up to you to place retirement savings near the top of the list.
Ultimately you should look to moving ‘retirement savings’ into the fixed expenses category, making a commitment to investing each month. It’s amazing how quickly you will get used to a little less disposable income.
3. Identify your goals
A budget is the first part of your financial plan and gives you a good idea of where you are currently. The next step is identifying your goals and putting a process in place to achieve them. In this series we focus purely on your retirement savings goal, but you may have other goals, such as saving for your child’s education or a holiday.
4. Calculate how much you need to save each month
According to our research, to save enough to eventually withdraw an income of 75% of your final salary (widely believed to be the amount you need to maintain your lifestyle), you need to have saved twice your annual salary after working for 10 years, five times your annual salary after working for 20 years and 17 times your annual salary after working for 40 years.
Consider how long you have until you retire – this will influence how much you need to save each month to meet your targets. You can read more about this in part 7. You then need to think about how much risk you can stomach – higher risk investments such as equities tend to deliver higher returns over time but the ride may be bumpy as returns can go up and down. Finally you need to consider whether or not you may need to access your investment before you retire. These elements will inform which products and underlying investments you choose and how aggressive you need to be to achieve your goals. (We will cover the options available and asset allocation in parts 5 and 6 of this series.)
5. Do some homework
Take the time to research investment managers and what they offer. This will help you to be confident when you make your decisions, and prevent you from jumping ship at the wrong time and potentially losing money. Successful investing is all about the right partnerships. Objectives need to align, value systems should resonate and trust plays a key role. These criteria should guide your decision when picking an investment manager. If you make the right choice, you could be on the path to a successful long-term relationship.
6. Automatically increase your future contributions
When you sign up for retirement savings consider an automatic escalation. Research has shown that if you commit in advance to allocating a portion of your future salary increases towards your retirement savings you are less likely to feel you are making a sacrifice. This is because your increased contributions towards your retirement savings will be deducted before you have a chance to enjoy the increased income.
7. Don’t procrastinate
Each month that you put off saving in favour of spending either increases the amount that you’ll have to save in the remaining months, or pushes out the date at which you’ll reach your goal. Few investors in their 20s realise the drastic impact of only starting to save in their 30s. Putting off saving for 10 years can chop a massive 40% off your end amount. This is discussed in more detail in part 3.
Acknowledging your future financial needs and making concrete plans to meet these is a discipline that will benefit you and your family enormously.
If putting a plan in place and choosing investments is daunting, an independent financial adviser can help you analyse and adjust your monthly expenditure to help you make space for retirement saving.
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