Using an apocalyptic analogy to group four financial concepts errs on the side of being overly dramatic. But perhaps a little drama is needed to prevent these horsemen from eroding your precious nest egg early on in retirement.
So what are the four horsemen exactly? Well, if you’re a regular reader of this blog you’ve met them before: High Drawdown Rates, Fees, Inflation and The Right Risk Profile at the Wrong Time.
Whether you’re close to retirement or still have some way to go, keep these four horsemen at bay to ensure your retirement savings keep up with you.
1. Drawdown Rates
One of the most critical aspects of retirement planning is determining the rate at which you withdraw funds from your savings. A high drawdown rate has the potential to deplete your savings faster than anticipated, while a drawdown rate that’s too low can remove all enjoyment from your golden years.
Local policy mandates that your annual drawdown rate must be between 2.5% and 17.5% each year, with 4% deemed the magic number.
So how can you keep your drawdown rate low when everything else is going up?
- Make space in your budget for discretionary savings to supplement your monthly income when needed. This is where savings vehicles like a tax-free savings account can come in really handy.
- Make additional income streams part of your pre-retirement planning – whether it’s a side project that has earning potential, or part-time work. As we said in last month’s blog, being retired doesn’t necessarily mean retiring from your (work) life.
2. Fees
Fees associated with investment products can quietly erode the overall value of your savings. Every percentage point has a big impact when you’re investing over a longer period (we wrote a whole blog about it here). That’s why it’s essential to be aware of fees – always.
3. Inflation
Inflation negatively impacts the purchasing power of your money over time. Failing to account for inflation in your retirement planning can result in underestimating the amount you need to maintain the lifestyle you want.
Unfortunately, inflation is not something within our control. But we can, to an extent, control the fees we’re paying when investing and invest in products with returns that outpace inflation.
4. The Wrong Life-Stage Risk Profile
The risk profile of your investment portfolio should evolve with your life stage, as a conservative risk profile in your 20s or all-in aggressive investing in your late 50s and 60s can do more harm than good.
An aggressive risk profile is ideal for younger investors or investors with a longer investment horizon, as you have time to ride out the dips while the highs can give you great returns. But as you get older, one’s focus should shift from robust growth to capital preservation with an element of healthy growth.
By empowering yourself with knowledge through desktop research and consulting with a trusted financial advisor, you can tame these risks and ensure a healthy and trustworthy nest egg.
Retire blog
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.
