Managing Retirement
Risk
Ferdi Jacobs
BVSA
N
ot having sufficient capital to provide
an individual with a monthly income
during retirement is one of the biggest
risks for investors around the globe.
Some of the main reasons are the following:
• Start saving too late
The earlier a person starts saving, the
greater the effect of compound interest.
Albert Einstein referred to this as the
8 th wonder of the world. “Those who
understand it, earn it and those who do
not understand it, pay it.”
The magic of compounding interest is
that two individuals may for example
contribute the exact same amount over a
certain period, but the person who started
earlier will have a much higher value at
retirement.
• Not preserving
Withdrawing retirement fund savings upon
resignation from an employer, instead
of preserving the funds for retirement, is
one of the biggest mistakes and pitfalls for
investors. Not only will these withdrawals
be taxable but they’re also losing the
future investment returns that could have
been earned on the withdrawal amount.
This is a big opportunity cost and the
individual will have to start saving all over
again and trying to play “catch up” is highly
unlikely, which may result in insufficient
capital at retirement.
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• Saving too little
Having a retirement fund in place is one
thing but saving enough within that
retirement fund is another. It is the same
as having a vehicle to get from point A to
B, but not having enough fuel to get you
there.
There are many individuals who belong
to a retirement fund without doing a
retirement needs analysis/calculation to
determine whether they are saving enough
for retirement.
People prioritize differently and
unfortunately retirement savings is often
at the bottom of that list.
• Longevity
Improved healthcare and medical
advances are key factors contributing
to the increase in life expectancy. Living
longer is a risk to individuals who did not
make adequate provision for retirement
and even if they did, there is the risk of
outliving their capital.
It is important to manage the amount of
income you withdraw during retirement.
This will not eliminate longevity risk but will
most certainly decrease the risk.
Having a financial plan in place is key to
managing long-term retirement risk.
Ferdi Jacobs
www.bvsa.ltd | [email protected] | 021 914 9604
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