Having a comfortable retirement is a common goal we all share. For me, it would be being able to wake up every day in retirement knowing I have enough money not to have to worry and being in a position to allocate my time to those activities and people that mean the most to me – I am sure we are on a similar page here and an image popped up into your mind of how that retirement might look for you.
So, what I wanted to discuss with you has been highlighted by the global pandemic and is more prevalent than ever. There is a vitally important question we need to fully understand before we make any investment decision: Is this money I am putting away meant for savings, or is this money intended to be invested? Why I ask is that the first question answers our short-term needs such as having an emergency fund in place to cover unexpected costs (those that fall out of our budget and can’t be covered with our disposable income) or in a worse case scenario, to provide you with an income when you are out of work or unable to work. The latter question focusses on that image of your comfortable retirement, i.e. a long-term decision where the money is invested and not touched until you retire and need your investments to start working for you. Both are equally important but understanding the difference between the two will make the world of difference to you when making your decision.
The reason this article is tackling this question is that this is often neglected, and any money put into an investment vehicle is blurred into one phrase, “retirement planning or retirement savings”. Do not get me wrong, retirement planning and ensuring we are ‘saving for retirement’ should be the main focus of any financial plan, but we are obviously well aware that the road to a comfortable retirement is not paved with gold bricks and a smooth and easy ride to the end. We are often faced with difficult bumps in the road along the way and detours we cannot avoid. Having the end retirement goal in mind when making any decision will serve you well, however, I would like us to spend a minute here on ensuring we have the necessary support in place when we are forced to detour from our financial plan.
One obvious detour has been the current lockdown and the economic devastation it has brought us. It is estimated that as many as 7 million South Africans may lose their jobs because of the measures put in place to save lives. Industries are facing decisions that may alter their methods of operating forever, and many people argue that life as we knew it may never fully return. With many companies having to shut down their operations or reduce their capacity, many people have either had their incomes reduced or have lost their incomes altogether. We sincerely hope that these measures are temporary, and many livelihoods are restored as soon as possible. The point here is that having an emergency fund in place would have alleviated a lot of suffering. Having money easily accessible and earning a decent rate of return will give you that comfort in knowing that you have a plan in place to protect you and your loved ones, should this type of scenario play out again. This is an extreme situation, I get that, but even costs that may plunge you into monthly overdraft can be handled through a well-funded and thought out emergency fund. These types of funds can very and may be your access-bond if you are paying off a property for example or an Investec CCM account where the money is easily accessible. An industry “norm” is 3-6 months of income saved away for an emergency.
Now your retirement plan is where patience is required, where money is put away for a long time. A long time here is not 5 years or 10 years, but as a 30-year old it can mean 35 years until retirement. Why I brought this question up earlier is that the decision process behind making an investment decision for such a long period of time means that you can take on more risk through growth assets (equity & property) without being too concerned with what happens to the markets over a short period of time, kind of like the situation we are going through now. Markets have had a torrid few months, however, this should not force you into any investment decisions that move away from the retirement plan you have in place. Our job and with the help of Morningstar, is to ensure you have the correct asset allocation mix to suit your personal situation and your personalized retirement plan.
The point I am trying to stress here is that saving for an emergency and saving for your retirement are two very different decisions. There is huge value in having both in place and for your own benefit, making sure you fully understand that money being invested is for your retirement and should ideally be left for as long as possible and money being saved is there for any short-term bumps in the road.