How to prepare for retirement in 2024

South Africans saving for retirement have to account for the fact that they are likely to live longer than previous generations, requiring a shift in their approach to investing for retirement. 

This is feedback from the chief investment officer at PSG Wealth, Adriaan Pask, who wrote in a note that longer lifespans would result in more years of healthcare expenses and, thus, financial support in retirement. 

Saving for retirement is fundamentally a long-term financial strategy, Pask said. Its success hinges on the ability to generate real returns over time. 

Generating returns above inflation ensures that the purchasing power of your savings is preserved.

Unlike shorter-term financial goals, retirement planning requires exposure to equities, as the asset class delivers the best protection against inflation over longer periods, Pask said. 

Investing in equities diversifies risk and is a powerful tool for maximising wealth creation. 

While equities are often misunderstood, as they display the most volatility over the short term, returns over the long term are not as unpredictable as commonly believed. 

By allocating a portion of their investment portfolios to a diverse range of stocks, investors can spread risk across different industries, sectors, and geographic regions. 

While equities inherently carry more volatility than other investment instruments, they also offer potential for long-term capital appreciation, and dividends can contribute significantly to overall wealth accumulation.

As seen in the graph below, the actual returns on cash have been in a very limited range since 1985, as one would expect. 

However, while equities have a wider range in the short term, real returns from equity exposure are narrower in the long term. The longer the investment period, the more certainty the asset class will deliver superior returns.

Pask said to maximise their returns, investors should have a long-term mindset which enables them to capitalise on the performance of equities. 

The stock market is inherently subject to fluctuations influenced by a range of factors, including economic indicators, market sentiment, and geopolitical events. 

While short-term volatility may lead to fluctuations in the value of equities, the long-term trajectory has shown a capacity to outpace inflation. 

Thus, investors with an investment horizon that spans several decades can benefit from the compounding effect and the overall growth potential of equities. 

Savers for retirement must also maintain a disciplined approach and adhere to their established plan, and asset allocation is a key principle in achieving long-term wealth-creation goals. 

Unfortunately, Pask said that many investors tend to move away from equities into less risky, more conservative investments when market volatility increases, which comes with a long-term opportunity cost. 

It is important to understand that markets naturally experience difficulties, but attempting to time these movements can be challenging and often counterproductive.  

Emotional reactions to market fluctuations or short-term uncertainties can lead to impulsive decision-making that may undermine the overall investment strategy and jeopardise the outcome of the long-term financial plan.

The best way to weather uncertainty is to stay invested. Accept the short-term volatility, and be rewarded for your patience in the long term.