Although there’s no no-one-size-fits-all solution to retirement, the six factors – or levers – that Old Mutual Corporate Consultants has identified can help boost your retirement savings. Your retirement investment strategy is one of them.
Why is a retirement investment strategy important?
An investment strategy is important because it brings compound interest into the equation. There are two things to keep in mind for your strategy. It needs to:
- Focus on the long term
- Beat inflation
What impact does inflation have on retirement planning?
Inflation is your enemy when you're saving for retirement. And the reason is that, over time, inflation erodes the value of your capital. And of course, that's important because you're saving for your future income needs. The spending power of that income is important.
Your investment strategy needs to beat inflation, but it needs to beat inflation by a fair margin. It's not just by a small amount, probably in the region of inflation plus 5% per annum on average. And that assumes that you're contributing 15% of your salary over a 35 to 40-year period.
So, inflation plus 5% is quite a challenging target. You need growth assets in your strategy to achieve that kind of return. And growth assets means exposure to the stock market, to property, even including things like private equity, hedge funds, infrastructure; those are all growth assets. But then you need to balance those growth assets, because those are the assets that can be volatile. They can experience big falls in terms of the value. So, you need some more conservative assets. Those are things like cash and bonds.
Over time, you want that strategy to deliver the inflation adjusted return or the inflation plus return, without excessive volatility.
Why do you need a long-term investment strategy?
When it comes to your investment strategy for retirement, you must focus on the long term. You can't think about one year to the next, because then the risk becomes quite difficult to manage or to bear. So, over time, you want to make sure that you're focused on your end goal, which can be a 30- or 40-year time horizon, and not get too emotional about the short-term swings in your investment returns.
Now that you’ve learnt about investment strategies for retirement, watch the rest of the videos in this series to learn about: