Decide on the lifestyle you want to lead before working out how much money you need to invest for your retirement and where you should be investing it, says Andrew Bradley, managing director of Brait Management company.
Speaking at the Independent on Saturday/NBS Investors Club in Durban recently, Bradley said you don't work for money - you work for the lifestyle that money can buy you.
The following is a step by step plan to help you make the most of your investments:
1. Determine your lifestyle objectives. Decide what kind of lifestyle you want when you retire. Do you want to go overseas every year? Do you want to drive a fancy car?
2. Work out how much money you need to meet these objectives in today's terms and multiply that by a factor of 20, to see how much capital you would need, in present day terms, to generate this income.
For instance, if you need R100 000 a year to live on now, you must have R2 million to invest to take care of your needs on retirement - R1 million to generate income and another R1 million to keep up with inflation.
If you do not have R2 million, either you will run out of money or you will have to cut back on your lifestyle.
3. Calculate the returns you need. If you have only half the required R2 million now, and you want to retire in five years time, calculate how to generate another R1 million.
As a rule of thumb, you need a return of five percent on your R1 million, after subtracting inflation.
Inflation has averaged about10 percent over the last 10 years, so you need a return of 15 percent from your investments.
4. Allocate your investments. You should allocate your investments among the four asset types: cash, gilts, shares and property.
Historically cash has provided real returns to South African investors of one percent, gilts of two percent, property at one percent and shares between eight and 10 percent, says Bradley.
Each asset type has its own risk/reward ratio.
This is the risk that you bear in return for certain rewards. Generally the higher the risk the higher the potential rewards.
You need to find the right risk reward ratio for your particular needs. It is a good idea to spread your investments because this lowers the risk.
5. Select a fund manager to manage your assets for you.
It is important to stipulate exactly what your benchmarks are to your fund manager.
6. Use the most effective vehicle. Make the most of the benefits, tax and otherwise that each investment vehicle offers.
There is no such thing as good or bad investments - there are only appropriate and inappropriate investments depending on your needs and risk appetite, says Bradley.
There are a plethora of products on the market, including assurance products, unit trusts, fund of funds, wrap funds, multi-manager funds and linked products from which to choose.
7. Review your portfolio. There are three key principles in investment planning.
These are:
* Focus:
You must be focused on what you want to achieve;
*
Learn from your mistakes:
Don't be greedy by being lured by what looks like the best returns, it may be the most risky investment. You cannot time the market.
Bradley says research has shown that you need to time the market accurately 70 percent of the time to beat a buy and hold strategy. Even the best fund managers only get it right 60 to 65 percent of the time; and
* Discipline:
Don't chase returns, says Bradley. Figures show that the perception that chasing returns actually delivers the returns is an illusion.