Building a sound retirement strategy when you’re slow off the mark

Article by Well Spent.

Original title: Listen up, late starters

One of the more common questions we get asked, is along the lines of: “What do I do if I’ve left retirement saving a bit late in life?”

The answer is relatively simple.

‘Relatively’ in the sense that it’ll require some changes to your lifestyle, and can’t be dismissed as inconsequential. Let’s not forget that you’re planning on saving; saving means ‘not spending’. Unless you have a money tree growing in your garden, sacrifices are going to have to be made.

‘Simple’ in the sense that those few variables that account for 99% of your investment performance over the long run, can probably be explained in a few pages. Appreciating them, and committing to them, means you’re 99% of the way – the rest is out of your hands.


Getting the basics right

It is important to realise that there are very few ‘things’ that will dictate your investment returns over the long run. Get them all right, and there is little more that you can do to give yourself the best shot at your long-term investing goals. To go into all these ‘things’ now will likely confuse you, so allow us to focus on the one that really matters right now.


Costs: think of them as negative returns

Increases in the value of your unit trusts is good.

A quarterly report from your pension fund showing a 6% return for the quarter is great.

Increased investment returns are good.

Anything that would look to reduce those investment returns is bad.

One item that is generally responsible for a reduction in your investment returns are costs. Costs can creep in, in many places. Annual unit trust costs, platform fees, policy admin fees, investment management fees – the list goes on.

We don’t think of this as being contentious, so we’ll leave it at that.


Taxes: Just another cost

It’s when you start to appreciate that taxes paid on your investment money as being nothing more than a cost, that you start to appreciate the power of ‘tax deferred investing’.

All your investments will earn things like dividends, interest, capital gains, maybe even some rental income. As and when these income sources are earned, taxes need to get paid. You are left with an after-tax amount, which can be reinvested and so the cycle continues.

What if you didn’t have to pay tax?

What if you could earn all those investment returns, tax-free, and only pay tax when you want to access the money?

If you think of tax as a cost (which it is), and you consider how avoiding this cost is possible within a tax deferred investment vehicle, then you must realise the long term benefits of avoiding tax, especially when you appreciate the negative effects of compounded costs that add no value.

We don’t think paying tax adds any value to your investment balance.


Retirement annuities

When it comes to investing and doing what you can to get more out of your investment balance, paying attention to things like taxes is one of the few things you can actually do, to enhance your investment returns.

A Retirement Annuity or RA, allows investors to invest in typical underlying investment products, but all within the confines of the RA ‘wrapper’, meaning that you pay no tax on your investment returns while you’re still saving towards retirement.

The economic advantages presented by saving on your taxes, and those savings compounding over years and years are enormous. You could end up with 10%-30% more money in your bank account when you retire based on how much tax you can defer, and the kinds of asset classes you invest in.


Takeout: If you don’t have an RA, consider getting one.

RA’s are designed to incentivize you to save. Whether it be the taxes deferred or the very generous income tax deductions for contributions, utilizing an RA offers real tangible benefits for long-term investing.

So if you’ve left all this saving stuff a bit late, the important things to remember:

The best time to start is today.

The basic principles of long term investing are proven to work better and more reliably than risky shortcuts.

Cutting costs and avoiding tax will greatly increase the compounded growth of your investments and savings.

The journey is long and these things take time. Sometimes the only way to really believe or appreciate the difference it does ultimately make, is to listen to sound judgment like our own, or that of a financial advisor who can take you through the nitty gritty of how an RA might compliment your long-term investing goals.