Invest in your nest egg wisely

2010-11-13 14:04

According to Mike Heeley, a financial planner at Alexander Forbes, your company retirement fund is usually not enough to provide for your full income needs on ­retirement.

It is, therefore, important that you ensure that you will be able to retire financially independent by setting up your own additional ­savings plan and to do this as early as ­possible.

Heeley says Gail has done this to some extent in that she has two rental properties as well as a ­money market fund and ­retirement annuity fund.

If Gail does not spend the rental income but rather saves it for ­retirement, she will be able to retire comfortably.

What becomes important in Gail’s situation is that the money is invested appropriately so that she can benefit from long-term real growth from her various ­investments.

Gail’s retirement plan
Gail has 24 years of earning a ­salary ahead of her as she intends to retire at 65.

Heeley says, generally, the younger one is, the longer your ­investment time horizon is and hence the more investment risk one can afford to take.

What this means is that, ­someone Gail’s age can afford to be more aggressively invested than someone who is two or three years away from retirement.

Time horizon
This means that Gail should be holding the bulk of her portfolio in equities (or shares of companies listed on the stock exchange) and less in bonds (fixed interest) and cash. As she draws nearer to ­retirement so this position should change to ensure that her asset ­allocation in her final year of work is in alignment with the type of ­annuity (retirement income) she will purchase when she retires.

Heeley says Gail’s company ­retirement fund and her ­retirement annuity seem to be ­appropriately invested.

Her discretionary investments (additional savings), however, could be adjusted to reflect her ­investment time horizon.

Gail currently invests monthly into a Money Market Fund.

In the current interest rate ­environment cash is not a great ­investment strategy for any ­investments with a time horizon exceeding one year. Heeley says it is important to invest the money in such a way as to ensure a longer-term inflation beating return, which means taking on some ­investment risk through holding a balanced portfolio of assets.

Emergency fund
It is important to put in place a fund that you can access in case of emergency without having to dip into your long-term savings.

The goal of the emergency fund is not long-term growth but rather to be there should something ­happen and you need to access the money quickly.

Capital stability is therefore the goal of this money and it is ­appropriate to hold it in cash.

Heeley recommends an
emergency fund of about R100?000 and this can be held in the Money Market Fund.

Heeley suggests that Gail continues to invest R1?000 a month ­into her Money Market Fund in ­order to build up this emergency fund. Once she has reached her goal this money could then be ­redirected to another investment.

Long-term savings
The remainder of her rental income needs to be invested for her retirement which is in 24 years’ time. Her goal with this money is to generate as high a return as ­possible and this means investing in equities.

Heeley says over longer periods of time equities have given the best returns in relation to inflation, however they are also the most ­volatile of asset classes.

This means that there will be ­periods of negative performance so Gail needs to be prepared for this and be prepared to stick with her investment strategy through thick and thin.

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