Retirement Savings Tips for Those Who Haven’t Started Yet
If you still haven’t figured out a retirement savings strategy, there’s no time like the present. We share some practical retirement savings tips to help guide you.
The Magic Formula
Magicians are masters of the art of trickery. With deliberate skill, they captivate the audience just long enough for an unnoticed trapdoor to open or for a hidden card to sneak into the deck. This momentary distraction is referred to as The Prestige and, without it, many magic tricks would undoubtedly fail.
While this kind of magic can be amusing on stage, we must rely on the mundane in real life. The prop used to saw a woman in two, for example, might not be the same tool you’d opt for on a construction site! When it comes to investing, the same principle applies.
Oftentimes, prospective clients desire a way to turn a portion of their income into enough money to ensure a comfortable retirement. Life, however, is not a magic show. No amount of desire can turn your current income into future security, but you’d be surprised to see what true commitment achieves over time.
And sometimes, the magic lies in the mundane. So, here are five frugal retirement tips to enable you to experience this magic first-hand.
Retirement Saving Tips to Get You Started Today
1. Failure to Plan is Planning to Fail
When setting goals for your retirement savings strategy, it’s important to make them achievable. Should your spending or investment returns look very different to your assumptions, you might have to reassess your plan of action.
Furthermore, the closer you get to retirement, you might notice the sum you need to meet your goals accelerates. However, most of the return at that stage will be from compounding.
2. Are Your Returns Higher Than Inflation?
In order to earn real returns, you need to measure risk. Risk entails an uncertain outcome over the short term, implying that your investment journey won’t always be smooth sailing.
Even in a carefully managed portfolio, like a Balanced Fund, over one year, your returns can fluctuate rather dramatically! It’s important not to let them throw you off your game. If you remain focused on your long-term plan, all of those ups and downs will even out in the end.
3. Don’t Play the Fortune-teller!
Switching is a term referring to the action of selling out of one investment to buy another. It involves predicting what you think will happen in the future. In the world of investing, unless you own a crystal ball, it might be wise to steer clear of prediction entirely.
You see, when uncertain markets confront us, we tend to have a bias for action. Although it may seem more difficult to stay consistent or do nothing in a down market, this course of action may be the best! Switching can destroy value, as doing too much may mean your ultimate undoing.
What does this mean, exactly? Well, when you invest in a Balanced Fund, you have exposure to more than 100 holdings in different asset classes. This is, in investment terms, very well diversified.
Furthermore, investing all your eggs in one basket, or, practically speaking, in multiple balanced funds, won’t necessarily give you greater diversification. Instead, it will spread your investment more finely. This means that, potentially, you could receive no better than average market returns while paying higher fees than necessary.
5. When Should I Start?
The answer is simple: as soon as possible! Although we can procrastinate saving for retirement over the first ten years, the consequences remain.
As indicated in the graph below, investors starting at the ten-year mark after starting their career and depositing 15% of their income of R20,000 per month, and taking inflation into account, will result in a return of 11%.
However, those earning the same but already started contributing to their retirement from their first pay cheque will get a much bigger return. Here we see the magic of compound interest in action, the key ingredient of which is TIME.