Investing for retirement is not rocket science. Just do it. New products make it cheaper than ever. For many South Africans the first time that they think seriously about funding their retirement is when their parents retire. And these days that usually comes with the sobering reality that their parents haven’t provided sufficiently for retirement and need financial support. This need comes at precisely the time that families are most indebted – they have car and bond or rent repayments to meet; school fees or day-care fees to pay, and probably a decent amount of credit-card debt to service as well. The thing that inevitably suffers is long-term saving. I was lucky. My mom managed our household budget like a grandmaster plays chess – with total concentration. If you need any indication – the wax paper around my school sandwiches was wiped off daily and had to last the week. My parents are still careful with their spending, but they have retired comfortably, they can afford the odd luxury and place no demands on their children. It’s a pity then that I didn’t imbibe more of those lessons. I was almost 40 when I started to tot up my various retirement investments – and found the usual suspects: a PPS investment here and a Liberty RA there. If I was to rely on them I’d have to die young. So here I am, at 44, scrambling to put enough aside for retirement. I save over 20% of my gross salary and won’t be retiring anytime soon, or at all if research by retirement fund provider Alexander Forbes is anything to go by. The research indicates that you now have to save almost 20% of what you earn over a 40-year period to buy an adequate pension. The moral of the story is to start saving with your first pay check. And unless you contribute to a pension scheme at work, the best way (for most people) to do this is through a retirement annuity (RA). Don’t be tempted by friends who tell you that you can beat the market if you invest yourself – this type of boundless confidence can cost you dearly. There are two reasons that RAs are the way to go when it comes to long-term savings. One is that an RA offers tax advantages to individual savers; and the other is that you cannot access these savings until you are 55 – and nor can your creditors. More often than not it’s these advantages that outweigh the tax benefits. Of course, when it comes to costs, there are RAs and RAs. You’ll want to go for one of the ‘new generation’ unit-trust based products. These were launched in response to the costly traditional insurance-based retirement annuities and are available through the unit trust companies. But even in this universe the difference in fees charged and sheer number of choices can be overwhelming. At least all fees – such as those paid to the product provider, also known as the linked investment service provider or LISP (for example Discovery Invest or Allan Gray) and those paid to the fund manager (for example Coronation, PSG, Cadiz, Foord) must be disclosed upfront. While fees have come down, the total cost of retirement investing in SA currently is still around 3%. It doesn’t sound like much but over 40 years this could absorb as much as 75% of your return. The good news is that a few financial companies are trying to reduce the costs of saving for retirement further. The government is also putting the entire industry under pressure to reduce these costs. The best known example is 10X Investments which offers investors one solution which varies according to your age. Its maximum investment fee is 1.03% (incl VAT) and this covers all fees including platform fees, admin fees and so on. Satrix, ETFSA and ITransact also offer RAs underpinned by index trackers, but none are quite as cheap as 10X. But take note, there is a new unit-trust based product on the market – and investors would be mad if they didn’t look at it more closely. It is by far the cheapest retirement product on the market. A week ago industry veteran Magda Wierzycka and her team of rocket scientists at Sygnia Asset Management (incidentally the second largest institutional multi-manager in the country with assets under management in excess of R100bn) dropped a bomb on the long-term investment industry. This was in the form of a basket of retirement products, including RAs, targeted at the retail investor which are priced at an unbeatable all-in price of 0.4% per annum, including VAT. As the fee includes the provision of the retirement product, administration and asset management, there won’t be a retirement product in the country anywhere close to that. Sygnia’s retirement products are underpinned by passive unit trusts which Wierzycka says provide a simpler and more cost efficient means of index tracking than ETFs. So, as Wierzycka herself told me, if you haven’t got a pension plan going, find a suitable product, invest 20% of your gross income in it, and forget about it – without further ado. And by all means, if you want to invest in shares or unit trusts – then do that with your discretionary income, not your long-term savings. -Moneyweb
Posted on: Fri, 25 Oct 2013 05:51:52 +0000
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