Essential rules for investing for retirement

Feel free to reach out to PSG Wealth adviser Ross Marriner directly.

The key to investing for retirement is to understand certain essential rules and to remember them, especially when times get tough. The most important rule is to appreciate that investing is a marathon, not a sprint. In order for your investments to grow faster than inflation, you need to invest a percentage of your money in growth assets like shares and property. These asset classes are more volatile or risky than having cash in the bank and sometimes may lose value during market downturns. Cash, on the other hand, will always earn some interest and therefore may feel like a safer option. Historically, returns from cash have not grown any faster than inflation over extended periods of time, so it is unlikely that you will increase your wealth in real terms if you invest most of your money in this asset class. An appropriate strategy for most investors is to have a diversified portfolio of investments consisting of shares (local and offshore), bonds, property as well as some cash.

The difference between investing in cash versus a diversified portfolio can best be illustrated by an example. Two people retire on the same day, at the same age, each with R 5 million to invest. The first individual chooses to only invest in the money market and fixed deposit accounts at the bank, while the other invests in a typical balanced portfolio of investments. They both choose to withdraw an amount of R250 000 per year from their investments, increasing this amount by inflation every year.

Assuming that each portfolio performs at the average historical rate, the person who invested in cash-type investments will probably run out of money in just over 20 years. The person who invested the money in a diversified portfolio will also eventually run out of money, but only about 35 years after retiring.

Stock markets are cyclical in nature and often fall by 10% or more during a year. This may cause investors to panic. Some may be tempted to move their investments into the perceived safety of cash during periods of uncertainty with the intention of re-entering the market when times improve. Trying to time the market in this way often results in the destruction of wealth.

Investors who remain patient usually achieve long- term growth if they remain invested. Poor investment returns are painful and cloud one’s judgement, but the greatest returns are often associated with the highest level of market discomfort.

An experienced Certified Financial Planner® will be able to help you to plan for your retirement and ensure that your investments grow ahead of inflation over the long term.