Investing in a crisis 101

Statistics show that only nine out of every 100 South Africans will retire comfortably. David Crosoer, senior analyst at PPS Investments, gives us a few pointers on how we should be handling our retirement investments in 2009...

In the last few months of 2008 many South Africans will have reacted, with dismay, to the drop in the value of their savings accounts and retirement planning portfolios due to the global financial meltdown which hit both local and global stock markets.

As it might be tempting to use these events as an excuse for not saving or for making knee jerk reactions to your portfolio, like switching to less risky assets, South Africans should remember that when it comes to planning for your retirement one cannot afford to make mistakes nor be swayed by short-term fluctuations in the market.

After all, in only 40 years of work, we have to save for at least 20 years of retirement! This means that for every year that you work you need to fund at least six months of spending into your retirement planning.

Read on to see what you should be doing in 2009...

How does the crisis affect my portfolio?

The bad news will affect your assets in the short term which could be a year or two. In terms of retirement you are in it for the long-term and the markets will recover over time. It is a good time to make regular investments each month to take advantage of the cheap equity prices.

Should I make changes to my portfolio?

You might need to re-balance your investment portfolio. This typically happens when one asset class performs significantly better than another asset class making your portfolio look quite different from how it first looked when you set it up.

Rebalancing means you should sell the asset which has been outperforming and buy the asset which has underperformed. This sounds counter-intuitive, but makes sense if you want to keep your portfolio correctly positioned for your long-term goals.

However, if your portfolio was inappropriately invested before the crisis or your financial circumstances have changed you would need to talk to your financial advisor in order to make changes.

If I lose my job this year should I cash out my retirement savings?

If you currently have a company pension plan you are able to access the money if you are retrenched, fired or choose to leave your job. However, don't do it if you do not have to as you need to be aware of the tax consequences of doing so. Cashing out early means that savings cannot grow over time and you may be left facing a very difficult retirement. This same principle applies to cashing out other savings policies.

How do I know if I am saving enough each month for retirement?

You should talk to your financial advisor. There is also software you can download off the web. A simple rule of thumb is that by the time you retire you should have accumulated between 10 and 20 times your final annual income. Unfortunately, most of us will fall short of this. Statistics show that only nine out of every 100 South Africans will retire comfortably. So, start saving early or start now if you haven't thus far.

What are the tax advantages of contributing toward retirement savings?

A retirement annuity allows you to contribute 15 percent of your taxable income as a maximum tax-deductible contribution. Thus, if you earn R300�000 per year, 15 percent of this income (R45�000) per year can be used as a tax deductible contribution.

In essence you defer your tax payment on your contributions until you retire when you are taxed on the income you withdraw. This is to your advantage if your tax rate when you retire is less than your tax rate when you make your contributions, which will almost always be the case if you aren't saving enough towards retirement. Thus if you are behind on your contributions you will probably have a big advantage for saving in an annuity. Capital gains and interest earned are also not taxed with an annuity which is to your advantage.

Source

I'm not joining the crisis, find out how on future post.