By Buhle Langa, financial well-being consultant at Alexander Forbes
Much of financial wellbeing begins with the choices that we make on a daily basis, from budgeting, putting money aside for an emergency, curbing unnecessary spending habits, to the contribution rate and investment model you choose for your retirement investment.
Having a financial plan is always the first step you need to take when setting out your goals and how you plan to reach them. Your financial plan will change at different stages of your life – it should not remain linear.
Your needs will look different as you move through various phases of your life: from your early years in your career, to becoming established in your career and when preparing for retirement and after retirement.
The younger years
Investors in their 20s will have at least 40 years over which to accumulate their retirement savings and should focus on growth. In this stage of your life, aim to keep your savings invested in the most suitable investment vehicle for you.
Look for consistent long-term performance and keep your retirement savings invested between jobs to benefit from compound interest over the long term. A high allocation towards growth assets such as shares and property and the full allowable allocation to the global markets (in terms of legislation) could benefit you greatly.
During this stage of your life you will be focusing on planning for and creating your wealth. The choices you make during this time will be the deciding factor on where you ultimately end up during one of the most vulnerable times of your life, retirement.
People in this phase where they are starting to earn and spend more and are most likely attempting to pay off debt. Your investment objective could be more moderately high-risk portfolios to keep your money protected however this is dependent on your risk profile and appetite. Because of higher earnings and possible tax savings, first try to top up your compulsory investments as much as possible before building on discretionary investments.
The retirement years
Retired investors want to minimise risk and keep up with inflation. Your main objective would be to choose an appropriate income annuity option (either a life annuity or living annuity) that would best suit your retirement income needs.
One of the best things you can do for your retirement planning goals is taking advantage of compound interest. Consider selecting a healthy contribution rate of a minimum of 13 to 15% of your fund salary and investing in more aggressive investments or portfolios in your younger years. In turn, this should help you reap the rewards of the highest possible returns, compounded over the years leading up to retirement.
Two to five years before retirement, your focus now needs to shift towards protecting your savings that you have accumulated over the years. This also highlights why withdrawing your retirement savings before retirement is seldom a good idea and can be detrimental to your quality of life during your retirement years.
Discretionary investing for rainy days
In any life stage, make sure you have enough emergency savings so that any unplanned and urgent expenses do not derail your long-term goals. Being prepared financially makes the world of a difference when you have to deal with the breaking down of a car, a death of a loved one, or even the birth of a child.
With the correct financial planning advice, you can structure your investments and insurance without being caught off guard. A certified financial planner can assist in building your financial wellness by analysing your unique financial situation and offering a holistic approach to finding the appropriate solutions for you.
The perfect financial plan will not only look at making you financially well during your lifetime, but should also look at making sure that your affairs are taken care of even in the event of death.