By: Hannah Myburgh
The world of investing is filled with outdated rules of thumb and generalisations that have no bearing on our personal financial planning, and which can hopelessly mislead us. Here we explore and debunk 5 common myths about investing:
You need 70% to 80% of your pre-retirement income in retirement
This is a rule of thumb guideline that assumes you have no debt at retirement and are in excellent health. At the start of your investment journey, it is difficult to predict what your pre-retirement income will be. A better approach is to base your retirement projections on your spending rather than your income. This involves determining what you are likely to spend in your retirement years taking into account where you would like to live, whether you would like to travel, and the type of lifestyle you would like to lead.
I’m too young to think about retirement
Time is compound interest’s best friend and the earlier you begin investing, the more your investments will grow. If you’re generating an income, keep in mind that you’re permitted to invest up to 27.5% of your taxable income towards a registered retirement fund, which effectively allows you to invest with pre-tax money. Many mishaps can happen between your first job and the day you retire – things such as retrenchment, disability, chronic illness, or failed business ventures – and investing with your first paycheque gives you a longer investment timeline in which to prepare for possible setbacks.
I don’t have enough money to invest
Setting up an investment portfolio is accessible to most individuals, with many reputable unit trusts and robo-advice platforms requiring a minimum monthly contribution of R1 000 or a lump sum investment of R50 000. If you cannot afford the R500 monthly premium, start by saving what you can in a separate account to accumulate "seed" capital. Once you have saved enough for the minimum lump sum, establish your investment portfolio. As you adjust your budget and your income grows, aim to meet the R500 monthly contribution to consistently grow your investment over time.
The aim of investing is to get the highest return
The goal of investing should be to outpace inflation over the long term to meet your financial objectives. Chasing the highest returns often involves taking unnecessary risks, attempting to time the markets, and speculating. Pursuing last year’s top-performing unit trust, share portfolio, or ETFs can be risky, as it may lead to selling investments at the wrong time and incurring unnecessary tax liabilities. Instead, a balanced approach is key. Your financial adviser can help you define your goals, evaluate your risk tolerance, and develop an investment strategy that aligns with your long-term objectives and risk profile.
It is too late to start saving for retirement
If you haven’t started saving for retirement yet, it’s natural to feel overwhelmed, but starting late is far better than not starting at all. Once you commit, several strategies can help you build a retirement fund. Begin with a strict budgeting exercise to free up income for retirement savings. As you pay off debt, gradually increase your savings. You may also need to work beyond age 65 to extend your earning and investing years. Depending on your profession, consider ways to continue earning past retirement age, possibly through a second job or side hustle. Additionally, investing more aggressively could help you achieve higher returns, but this should align with your risk tolerance. Ideally, your strategy should combine spending less, saving more, working longer, and carefully taking on more investment risk. This comprehensive approach will improve your chances of building a sustainable retirement nest egg, even if you’re starting later in life.
* Myburgh is a financial planner at Crue Invest.
PERSONAL FINANCE