Do you want to achieve financial freedom?

Following South Africa's celebration of Freedom Day, 10X's Brett Mackay outlines five classic issues that keep many of us in personal economic bondage.

1. Delaying

Putting saving off is a common error and a killer. People who start saving early give themselves a lot more than a head start. They give themselves the benefit of compound interest, where growth builds on growth until you have a lot more saved than you could have imagined. The earlier you start, the better off you will be in the long run. 

If you are not sure how much you can afford, start small. Just make a start. Once you have started saving it is easy to stay motivated. You can always increase your contribution later; in fact, you should. It is advisable to increase your savings as your earnings increase. Ideally, you should be saving at least 15% of your earnings for your whole working life, but you may have started late and need to catch up or, perhaps, you are planning to retire early at, say, 50, meaning you will probably need to save more than 15% over a shorter period of time.

2. Industry complexity

The investment industry has become extremely complex with thousands of funds all offering different benefits. The choice available from even one fund manager can be blinding. As a rule of thumb, don’t buy something you don’t understand (and don’t believe anyone who tells you that investing is too complex for you to understand).

Do a little research and you will discover that an uncomplicated index fund that tracks the market and charges low fees will give the best chance of success, and the added benefit of no nasty surprises.

Talking about surprises, a lot of people are hit with a large penalty fee when they decide to move their retirement annuity. It is worth checking if the retirement annuity or other investment you are signing up for carries what is called a ‘termination charge’ or ‘exit penalty’, which can be as high as 30% of the investment balance. If there is a penalty on the product you choose, effectively a lock-in, ask yourself why?

If you are already signed up to one of these policies and think you can’t stomach the expense of moving, it is worth remembering that you will pay the costs whether you leave the fund or stay put. These penalties are effectively the accelerated recovery of upfront costs, such as sales commission and administrative costs. Over time, however, these costs can be recovered by moving your funds to a low-cost provider with good returns. 

3. High fees

Most South African investors have no idea about what fees they pay on their investments, especially (and most ruinously) on their retirement savings. This apathy plays into the hands of the retirement fund industry, which, on average, charges fees of 2-3% per year on retirement annuities. ‘Average’ implies that many of us pay more.

Paying a fee of 3% pa over 40 years will almost halve the real value (purchasing power) of your pension. And it will ruin your retirement. So, shop around for a low-cost provider, and be wary of actively managed funds, which tend to charge significantly more without securing better performance over the long run.

4. Putting all your eggs into one basket

Saving for retirement is very important, but so is cash flow for daily life, which unfortunately can include unexpected emergencies. A sensible financial plan will include different savings products for different purposes, such as saving for retirement and an emergency fund. 

You would be crazy not to take advantage of tax incentives for retirement saving offered by the government. These incentives apply to savings in specifically designed retirement savings vehicles. Essentially, if you save into one of these products you get tax back every year. As I said, you would be mad not to accept this free money.

That said, it would be foolish to put all of your savings into a retirement fund, which you cannot access until you are 55 or older. If disaster should strike you or someone you love you might need to access some cash quickly. As a rule of thumb you should have at least three months’ salary in a fund that you can access quickly. 

Having a plan in place that sets you on course to retire with dignity and a decent emergency fund are two key aspects of financial freedom. 

5. Denial

Whether people think retirement is a million miles off or they are certain they will make a fortune one day with some scheme that will suddenly come to them in their dreams, denial is very seldom anyone’s friend. 

People talk to me all the time about starting a savings plan next month or later this year without committing to when and how. This year becomes next year and the next thing you know we are all another few years down the road and some of us are full of regret. 

Whatever excuse you are using to not engage with the obligation that each of us has to put something aside for retirement you are wasting precious time gambling with your chance of financial freedom.

As they say, the perfect time to start saving for retirement is when you start working; the second-best time is now. Making a plan that sets you on course for a dignified retirement and executing it should be a simple and manageable process of small, regular steps. 

Start by entering your details into a retirement calculator, like the one on 10X Investments’ website , and generate a plan.

Take your first step to financial freedom today, even if it is a small one. If you are ready take a bigger step why not download the free ebook on saving and investing for retirement

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