It is often said the best things in life are free. However, this is not true when it comes to retirement.
Retirement savings come at a cost. That price matters because it directly affects what your investment growth. A small percentage differential in costs may seem trivial today, but compounded over 40 years, it could be worth millions.
Floris Slabbert, Director at Ecsponent Financial Services, explains that the costs associated with managing and administering retirement products reduce your returns and must be understood from the beginning.
“Costs associated with retirement savings create a divide between market returns and real returns after costs,” he says. “Some costs are clear and others are complicated or hidden. But one thing is certain, over the span of your working life they will have a material effect on your retirement. Costs multiply over time, resulting in a significant amount over the term of your investment,” he says.
Slabbert explains that it is always important to choose investment managers that deliver good investment returns. But adds that cost control also contributes to overall returns. “While investment managers have philosophies geared to maximise performance, the returns aren’t 100% predictable. Sometimes bear markets cause poor performance. At other times the fund manager’s strategy may be off target. It may also be that a fund outperforms the market before costs but gives a poor result after costs are added.”
“Costs, on the other hand, are predictable, with a set percentage over the term of the investment. By reducing these costs, you can reduce the disparity between the market returns and what you earn in your pocket,” explains Slabbert. “This gives you a definite impact on the value of your retirement.”
A 2013 discussion document by National Treasury, considered the impact of costs on retirement funds. In a startling revelation, Treasury showed that over a 40-year period (say, from 25 years old to 65 years old), a cost reduction of between 0.5% and 2,5% annually, would result in a benefit 60% greater, assuming all other variables were constant. In other words, by reducing costs, a R1 million nest egg could be R1.6 million if invested over 40 years. An astounding figure when compared to the task of managing and negotiating the costs of your retirement savings.
“Various factors will ultimately decide what you earn at retirement. These include how long you have been saving for, how much you have saved, the returns generated and, of course, how much you have paid in costs,” says Slabbert.
“Negotiating and understanding costs and getting solid and trustworthy advice on the best retirement investments, will stand you in good stead on your investment journey,” says Slabbert.
Some of the costs associated with retirement savings include administration fees, advisory fees and a host of other charges that may or may not be included in the administration fees. Slabbert suggests speaking to a reputable financial services company, such as Ecsponent Financial Services. That will help you gain a full understanding of the various products and services available to you.
“Preserving your retirement savings between jobs is important. So is saving over the course of your working life and reducing costs. At the end of the day, you want your retirement plan to be run like a well-oiled machine. Maximise earnings, minimise costs and you will be smiling at retirement age,” concludes Slabbert.