7 Deadly Sins of Retirement Planning – #2 Ignoring the impact of costs and debt.

Most South Africans, like our counterparts in other parts of the world, have a dislike for budgeting and fail to save sufficiently for their future needs. I suspect this has something to do with our almost 200 000-year-old brain. Learned professors tell me that we have to discipline certain parts of the human brain to unlearn a primitive behaviour that is inclined to “live for today, as we may not be alive tomorrow”! If we are inclined then to save less than we should surely then we should be ensuring that our money is as financially efficient as possible?

How do we do that?

Debt reduction

Embarking upon a debt reduction strategy (beginning with non-tax-deductible debt that has the highest remaining outstanding payment term (usually a credit card or other short term interest bearing loan, e.g. retail store loans that offer credit for the purchase of furniture) is an excellent way to be financially efficient. If you can add a bit of extra payment to the debt to shorten the payment term and once a debt is settled, the amount of the payment of that debt is then added to as an extra payment to the next debt until that debt is then settled and then the payments of the two are then added to the payment to the third debt until that is settled and so on and so on until you are debt free.

Identifying various costs of different financial products and product providers

Although legislation requires full disclosure by financial institutions, advisors and intermediaries there seems to be a hesitancy on the part of clients to question the necessity of certain costs, the amount of the costs and whether there are alternative comparative products with lower costs.

Costs are usually payable to the institution providing the financial product and to the financial planner for his services. You should be careful to establish the amount payable to each as they can be initial fees (these are costs that come off the top of your investment and cause your investment amount to be immediately reduced) and ongoing or annual fees. The latter are fees payable for the ongoing service provided to you. If you have not had contact with the planner for more than a year, why are you pay this fee to him or her? As long as the investment is held with the financial institution managing your money their fees, I believe, should be regarded as due and payable.

The long-term effect of excessive costs on investments can be devastating and any investment costs in excess of say 2% per annum (excluding VAT) should be queried with a view to a reduction. Think of it this way…. if my retirement investments are carrying a 3% investment cost and inflation averages at 6% my investments need to produce an average of at least 9% per annum to get a real return!

If you have any questions or you need help with planning your retirement, please contact us directly: info@verso-wealth.co.za