October is Halloween month in the USA and a large part of the country is abuzz with carved pumpkins, spider webs, costumes and decorations galore. Halloween is synonymous with scary movies, spooky stories and of course the ever popular “Trick or Treating” event.
On Halloween children dress up in costumes and go from house to house asking homeowners for a trick or treat. A treat is typically some candy while a trick is an idle threat to perform a mischievous act of some kind.
The analogy of trick-or-treating is one I often use when it comes to retirement investing. Are we tricking (fooling) or treating (rewarding) ourselves when it comes to retirement investing?
Five “Tricks” to avoid when it comes to retirement investing
- Your RA is for retirement not for fish and chips
Retirement funds (Retirement Annuities, Preservation, Pension and Provident Funds) exist for one purpose only - to provide for retirement. Don’t use them to buy a fish and chips shop, a sports car or even a holiday, use them for your retirement only.
Retirement Funds have excellent tax advantages and growth prospects designed for retirement. If you fiddle with them for purposes other than retirement, that is when things get really scary.
Use other investment options to save for purposes not related to retirement. Things like unit trusts, endowments, property and offshore investments are great options. They can even supplement your retirement plan.
- Less can be more
The old adage less is more is sometimes better when it comes to retirement investing. There is no real need to have more than one retirement annuity in my opinion. It is not the retirement annuity product that solely determines the retirement outcome, it is the investment funds within the retirement annuity that drive eventual investment success.
More retirement annuities can mean more fees and complexity for investors. Try keep things simple when it comes to your retirement planning. A company retirement fund in conjunction with a retirement annuity is a great start.
- Ask for your Effective Annual Cost (EAC)
Fees have a huge effect on your investment outcome over time. Simply put the more you pay in investment fees the less your money is working for you. The EAC is an industry measure that allows one to compare the charges across different investment providers in order to assist investors in making an informed decision.
Ask for your EAC and know what you are paying when it comes to your investment.
- Avoid the noise
In the history of time good and bad economic conditions are nothing new, they are just new to us at a certain point in time! Ignore both the negative and positive news and focus on your retirement plans. Negative news fuels bad emotional decisions like stopping your investments prematurely. Positive news can lure you into a false sense of security.
Focusing on achieving your outcome should be all that matters i.e. are you investing consistently?
- Rather preserve!
If you are a member of your company’s retirement fund and you leave your employer, don’t cash out and loose a large portion to tax, rather preserve the money tax free in a retirement annuity or preservation fund!
You worked to the bone to build up this money, why give some to the taxman? Preserve it and boost your retirement investing. Tax can have a substantial impact on your investment outcomes. It effectively makes you poorer!
Five “Treats” to fortify your retirement
- Start early
The earlier you start investing the more money you can accumulate. Just start, a little something is always better than a lot of nothing!
- Debit order
Put a debit order in place that automatically invests towards your retirement funds. In that way you avoid the temptation to spend the money foolishly. Debit orders help ensure investment discipline which in turn creates good investment habits.
- Tax Savvy Investing
Retirement funds are excellent tax efficient investment vehicles. Less tax payable equals more money in your camp working for you.
Consider adding other tax efficient options to your retirement mix. A Tax Free Savings Investment is a perfect example and when used in conjunction with your retirement funds can boost your retirement plan and give you a source of tax free income in time.
- Beat inflation
Make sure your retirement contributions are increasing by at least inflation every year. If you are lucky enough to receive an annual bonus take a portion and treat your retirement funds first and then yourself.
- Track it!
Track your investment annually. A good financial planner should be able to tell you if you are on or off track to reaching your retirement objectives. It is more prudent to focus on your projected outcome and to track it than worrying about the performance of your fund every day. If you are off track then implement steps to get back on track.
Whether your retirement ends up a “Nightmare on Elm Street" or a Dream Come True is largely in your hands and ultimately depends on whether you are tricking or treating your retirement investing.
Gareth van Deventer CFP®
Technical Advice Service Manager