Investing for retirement is not a one size fits all narrative. Some individuals prefer to hand their money over to a RA provider every month, hoping for the best, while others opt to play a more active role in their investments. If you belong to the first cohort, we won’t judge. But as your understanding of money grows, stretch yourself and put your newfound knowledge to practice – you’d be surprised how baby steps can compound over the long term. Below are some ways in which you can be more in control of your retirement portfolio.
First understand them, and then judge them – hard. The most important thing to remember about fees is that they will compound. For every 1% you spend less on fees when you start investing for retirement, you can increase your final pension by approximately 30%.
Are you paying for your financial advisor by the hour, or are they earning a percentage on the value of your investment indefinitely? Are they earning a commission on the product they sold you? If so, is this an ongoing arrangement? Just remember – you can negotiate with your advisor on the fees they charge you.
Being conscious of fees also applies to the products you invest in. Total Expense Ratio (TER) is based on the costs involved in managing an investment fund, and it’s mandated by law that TER fees should be displayed on a fund’s fact sheet. Shop around as TERs fluctuate between different providers – even when they invest in the same ETFs.
Choosing where your money is invested
Average Jo can also choose the underlying investments of their RA themselves, as long as it complies with Regulation 28 – the regulatory limits that guide retirement funds and protects them against poorly diversified portfolios while managing risk. Broadly speaking, Reg28 limits how much and where you can invest: Offshore equity, cash and bonds are limited to 45% and equities to 75%.
How you make those percentage allocations work for you depends on your risk tolerance and time horizon. For instance, you can allocate 45% to offshore equity, 30% to local equity, and 25% to more conservative assets (cash and bonds).
But the rule of thumb here is to always aim to have a good spread of asset classes, sectors and regions. Pay close attention to the index composition and constituents of the unit trusts and ETFs you invest in as they might be investing in similar sectors and regions.
We’ve mentioned this several times before, but regular portfolio check-ins are crucial to ensure you’re on track. Your personal circumstances are changing all the time – as well as your time horizon. Make sure your asset allocation is right for where you’re at in life. Refer to our post on Asset allocation at different life stages for some general guidance.
Although you have full control over the decisions that pertain to your RA, this is a terrain best navigated with a trusted, qualified financial advisor.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.