In our previous few articles on retirement annuities, we offered a better understanding of how these products should be used to accumulate assets for old age.
Whether you retire the old traditional style, or whether you are hip and happening, and would like to explore a different way of “retiring”, one thing you cannot escape is the need to build an asset for old age.
(Interested in reading more about retirement annuities, how they work and their benefits? Then check out our previous few blogs.)
What impacts your retirement investment over the long term?
Based on a retirement journey, the following two factors have the biggest impact:
- What fees are you paying over the long term, and
- Where are you invested? Meaning what investment portfolio are you investing in? What is your investment strategy?
For this blog, we focus specifically on the investment strategy discussion before we dig into the fees: where you are invested and how that impacts your retirement outcome.
Investment Strategy
Most people don’t have an investment strategy to start with, never mind discussing it with their financial advisor (if they have one). However, this creates issues in the retirement space, as I find young people (say late 20’s, early 30’s), invested in a cash (money market) or in a very conservative investment portfolios – when looking at their pension/provident/retirement annuity fund statements – with another 20 years to go before retirement… you can forget about the issue of fees here!
The problem with investing in a cash (money market) or conservative (low exposure to equities) type investment strategy is, over the long-term, you won’t be outperforming inflation.
Therefore, your growth on your retirement investment is not keeping up with inflation, and you become poorer in terms of your investment over the long term. You need your long-term investments to keep up with inflation or beat it, to provide you with either consistency or growth.
Cash or conservative portfolios don’t provide growth, but rather stability, for when you are closer to retirement, and looking to not lose money over the short-term, yet get a little bit of return above inflation.
As a person saving for retirement, always remember this – more risk equals more reward! However, keep in mind these fundamental facts when looking to take on more reward at increased risk:
- You must be able to invest your retirement money for the long term.
Therefore, do not access it in the short term, it should be growing for 30 years plus. Make sure you have an emergency fund to provide you with liquidity – allowing you time to grow your long-term (retirement) wealth and ensuring you don’t have to dip into retirement investments to pay for short-term debt obligations or need to pay general expenses on your budget. - Make sure you understand risk appetite and market volatility.
Most people cannot stomach the volatility of the markets, which happens when you invest for growth. (This happens daily, and yes, you are allowed to cry.) If you cannot stomach it, then make sure you understand it, and let your independent financial advisor do the checking for you and provide you with yearly feedback on how your long-term investments are performing and ensure.
Therefore, make sure you understand your retirement journey and what that end destination is, and together with your registered, independent financial advisor, discuss an appropriate strategy to follow towards reaching your retirement goals.
Make sure you talk about the points above, so you understand the journey, and they can help you through the darker (volatile) days.
Shouting and asking for help is free… try it!