Goal-based Investing for Retirement

by Rhoderic Nel FASSA Chief Executive Sanlam Employee Benefits and Mayuri Reddy Actuarial Specialist Sanlam Employee Benefits

One of the largest financial goals you have in life is one that you perhaps are not consciously aware of: saving for a comfortable retirement. The industry has grappled for some time with why exactly it is that people are so apathetic towards their future selves. We can all fairly easily grasp the benefits of losing a few kilograms – particularly after the festive season – but ensuring we’re “retirement fit” is not as obvious.

To meet a goal, you typically need two things: a definition of success, and a way to measure your progress towards that success. While you can decide relatively easily on a number of kilograms, centimetres, or percentage body fat you want to lose, and can measure these with little effort, very few of us can feel as comfortable with determining how much we need to save for retirement and how close we are to our target – this requires a lot of assumptions and projections into the future. To assist with this conundrum, Sanlam proposed a “rough rule of thumb” to measure progress, based on the number of years you have been working and your annual salary at that point in time. After 10 years of work, you should have accumulated approximately double* your annual salary in savings, after 20 years this should be 4 times* your annual salary, and at retirement (40 years after beginning work), you should aim to have 12 times* your annual salary. But these are only rough estimates as it depends on your contribution rates, investment strategy and current savings level.

It is important to determine your income needs in retirement and ensure that your progress towards your savings goal is measured against this, as factors such as interest rates or returns achievable will impact the “cost” of your income in retirement – whether you purchase a pension from a life insurance company or choose to manage your own income in the form of an investment-linked living annuity. This means your goal may change over time.
So you’ve done some quick calculations, and the feeling in your stomach reminds you vividly of that moment on 3 January when you step onto the bathroom scale… so what now? Together with a financial planner, you should assess your savings and investments, and plot a course to financial success in retirement, much as you would a fitness plan with a personal trainer. But there are some basics you can put in place yourself without any financial assistance.

Like any fitness plan, there are 3 components to retirement savings:

Healthy contributions
The first component – healthy contributions – as exercise is to a fitness plan, is usually the most difficult; it means having less of your salary in your pocket every month, because you are saving more. As with a 6am gym session, increasing or maintaining a high level of contributions is a lot easier when you have fewer commitments – no children to get to school, no 7am meeting with the CEO – and similarly, for many, saving at the start of their career may be the most workable solution, with fewer financial commitments like mortgages or putting children through school. There may be other financial commitments such as paying off student loans and buying your first car, but there is a significant benefit of compound interest that makes saving more when you’re younger far more easy on your pocket than saving at far higher rates later on to compensate. Saving R250 per month from age 24 to 30 will usually accumulate to more than putting away R250 per month from 35 to 65 – that’s a very good reason to start saving as much as possible, as early as possible.

Preserving your savings
The second component to your financial plan requires discipline – like not tucking into that piece of chocolate-fudge cake at the back of the fridge. While National Treasury is looking at ways to discourage us from dipping into our retirement savings excessively when changing jobs or being retrenched, current legislation still allows us to “stick a hand in the cookie jar”. The majority of trustees surveyed in the 2014 Sanlam Benchmark Survey consider lack of preservation to be the most critical mistake members of retirement funds are making with their savings, and the same survey showed 71% of members admit to taking some or all of their benefits in cash when changing jobs.

Choosing appropriate investments
The final component, investment choice, is akin to eating correctly; earlier on in your savings journey you want to have high exposure to growth assets – just like you need that first cup of coffee or ginseng-boosted smoothie in the morning. Later on you will need to temper your investments and preserve capital – akin to low GI foods to sustain you. There are a number of solutions that have been developed to assist members to invest appropriately, so that they are taking on appropriate risk at the appropriate time of their savings journey – a great example of this is Lifestage solutions. Much like choosing to follow a Banting diet, choosing certain Lifestage approaches ensures that your savings get the exposure they need to grow, with the sustainability of capital protection as a member approaches retirement. Be warned though – not all Lifestage solutions are created equal, and some may move you away from growth assets far earlier than may be optimal for you. As with a prescribed eating plan, you need to ensure that your selection is appropriate to your own circumstances.

Some members may be in a position to accept more risk earlier on in their savings journey, and may thus benefit from a portfolio with maximum exposure (as allowed for in Regulation 28 which governs the investment of retirement savings) in growth assets, such as equities. New portfolios are being developed to meet the needs of such members. Similarly, some members may not want to have the value of their retirement savings decrease at any point (even if only temporary) – some may require consistent returns at every point during their savings journey, while others will only need this protection closer to retirement when they are concerned that a sharp market fall prior to their retirement could dramatically reduce their retirement savings. For these members, it may be worthwhile to pay for capital guarantees and perhaps take reduced exposure to growth assets. Smooth bonus portfolios offer capital protection, and, depending on how the portfolio is managed, may still provide the same level of exposure to growth assets as the average balanced fund.

Although there are many factors which go into ensuring you are retirement-ready, as there are many factors to ensuring you’re at your optimum beach-body, the first step is to ensure that you have a goal and a sense of how to measure your retirement “fitness”. As you measure your progress towards this goal, you may realise that some drastic changes are needed – you may need to adjust your vision of endless cruises in retirement or think about scaling back on some of your current spending to ensure you’re saving more. But until you have a goal and start measuring your progress towards it, it’s akin to eating a buffet lunch every day and hoping you lose weight. Perhaps it’s time to make retirement readiness part of your list of New Year’s resolutions!

Sanlam Life Assurance Company (Ltd) is a licensed financial services provider.