Building a resilient retirement portfolio

By Janice Roberts
Editor

Shreekanth Sing

By Shreekanth Sing, Technical Legal Adviser, PSG Wealth.

Saving for retirement is probably the biggest, most challenging investment goal most people will face. Given that your retirement portfolio needs to sustain you in retirement for 30 years or more, the stakes are high.

So, what should you bear in mind when building a robust retirement portfolio that goes the distance?

Firstly, take stock of how much income you’re likely to need in retirement then ensure you accumulate enough capital to be able to deliver that. Your ability to do so will depend on how long you save for, how much you save and how you invest your money (both before and after retirement).

The importance of advice
Given the consequences of getting it wrong, it really is worthwhile consulting a suitably qualified financial adviser. Many industry insiders – very capable of “doing it themselves” – still opt to make use of the services of other qualified financial advisers (myself included). Clearly, they don’t lack the knowledge to make the decisions themselves. But having an outside perspective with an unbiased view (and using your adviser as a financial coach) make an adviser’s input very valuable and can help you achieve a better long-term outcome.

How much will you need?
The rule of thumb is to target a minimum replacement income of 75% of your last working salary. Of course, this differs from person to person. If you, for example, want to travel in retirement or leave an inheritance it would be smart to target a higher replacement ratio.

To fund this level of income, you need to save at least 15% of your salary over your working life. If you start working later in life, start saving for retirement later or don’t preserve your retirement savings when switching jobs, this ratio creeps up. And since life expectancy is increasing, and medical science is improving rapidly, you could find your retirement savings having to support you for longer than originally planned. So see these guidelines as the starting point in your planning, rather than the end goal.

Maximise your retirement contributions and save on your tax bill
When structuring your salary, it’s tempting to contribute as little as possible to your retirement fund; but the long-term impact of this decision is devastating. So rather choose to contribute as much as you can. With the various tax incentives on offer, the impact on your take-home pay may not be as bad as you imagine. The table below shows the impact of increasing your contribution amount.

 

Person A Person B
Current age 28 28
Gross monthly income R30 000 R30 000
Employee pension contribution 5% 10%
Total value of current retirement savings R70 000 R70 000
Months to retirement 443 443
75% of current income R22 500 R22 500
Income based on current savings R7 879 R14 594
Shortfall R14 621 R7 905
Tax savings with regard to monthly income tax Monthly income tax:

R5 802.58

Monthly income tax:

R4 617.68

Net monthly income:

R23 417.32

Net monthly income:

R22 382.32

 

Source: PSG Wealth. Assumptions: salary is only source of income; annual salary increase 7%, expected growth in value of savings equals inflation plus 4%, expected annual inflation rate 6%, replacement ratio 75%.

Make sure you invest with growth in mind

Next, ensure your retirement portfolio is well diversified and you’re investing enough in growth assets.  Retirement is a long-term game, and you need to ensure your money grows as much as possible to help you reach your target. Remember that retirement portfolios must comply with Regulation 28 of the Pension Funds Act, which aims to protect your retirement savings from the effects of poorly diversified investment portfolios. This is done by limiting the allowable exposure to more risky asset classes in investment fund selections to prevent unnecessary risks being taken with retirement money.  For example, it limits equity exposure (including offshore exposure) to a maximum of 75% of the total portfolio.

Focus on the bigger picture

Ensuring retirement success starts with being a bigger picture thinker. It’s how the various elements of your plan come together that ultimately ensures your retirement plan is robust and able to withstand the ups and downs of the markets.

 

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