When presenting a financial course, I often like to ask delegates to write down their biggest fear when it comes to retirement. Some of the more frequently raised worries are the inability to save enough and the fear of not being able to accumulate enough savings to provide a reasonably stress-free life once you are retired. Together with this, seeing your wealth retracting owing to the effect of costs in wealth creation, is often cited as a major fear and, indeed, a threat.
To create and sustain wealth and increase your net worth, there are only three ways to do this, namely increase your income, decrease your expenses and be more efficient in the use of your savings and other assets with the assistance from your financial advisor. For most, wealth is limited to the amount of income you earn and the value of assets you accumulated during your working life. It is only after your living expenses have been paid and all your taxes and commitments have been deducted that you will see what is left to be used for building wealth. For many, this means little to no actual money left to create wealth.
Nearly 75% of South Africans worry that they will not have enough money to live on when they retire, and they have every reason to be terrified. But don’t fret too much as it can sometimes be averted when taking a closer look at your expenses, fees and taxes.
According to the Financial Sector Conduct Authority (FCSA), when looking at the financial statements, statistics and quarterly reports from over 1 300 active funds (2019), the following costs are eating away at your wealth, including accumulated funds or asset-based fees, contribution-based fees, fees taken from benefit payments, fees for transfers, investment fees, market value adjusters, fair value adjustments, administration expenses including admin fees, audit fees, actuarial fees, levies, consulting fees, training, trustee expenses, legal fees and many more.
These costs have a debilitating effect on your investments, particularly in a low-inflation, low-returns situation, where ongoing costs for living annuities, for instance, can erode the value of the initial capital that you invest.
Wealth creation and planning starts by addressing your current situation, then considering applicable remedies for the future and finally taking action to implement those strategies.
When investing sensibly you have to make sure you are not spending a large portion of your growth in fees. Unlike the effect of compound growth, high fees have the reverse effect creating a black hole in your savings over time.
The generally accepted savings amount is around 15% of your monthly income during your working life, which in most cases boils down to around 40 years. By starting early, you will benefit from compound interest, therefore reducing the effect and erosion of costs on your investment, providing for a healthy financial retirement.
Unfortunately, not everyone is in that position, so to reduce costs try doing the following: when it comes to pension funds try to negotiate better fees, benchmark fees and costs and make the necessary changes when needed, and do an audit to understand the true costs. An audit will give a good indication of the transparency of costs from your service provider as well as the provider’s performance.
In South Africa, the Retirement Savings Cost Disclosure Standard, which came into effect in 2019, makes it easier to compare prices and ensure that you compare apples with apples. Under the RSC disclosure standard, all retirement savings costs must be disclosed as a percentage of assets to concur with the accepted way of expressing savings growth as a percentage as well.
Your type of investment strategy can also impact your costs negatively, so always make sure you speak to your trusted financial advisor to assist in making the most cost-effective decisions to ensure future financial health in retirement.