Financial Freedom Quick Tip #33: Problems with Pension Funds
For many people, the only investment they make for retirement, is the pension or provident fund they are compelled to belong with the company they work for.
It is not a bad thing to invest in a pension or provident fund. If you consider that only 6% of South Africans will be financially free by the time they turn 65, it is probably a good thing that employed people are forced to belong to such funds!
However, there are some problems with only investing in a pension fund.
It’s not enough
If you only invest in a pension fund for your retirement, there’s a very good chance that the money you’ll have saved by the time you retire simply won’t be enough for you to live off.
Most people, who only invest in a pension fund, have to drastically lower their living standards when they retire. Most South Africans have a dismal retirement to look forward to.
The Life Stage Investment Model
Another problem with many pension funds are that they use out-of-date investment models, especially the ones that use life stage investment model.
In short, this model means that during your younger years, more of your contributions are allocated towards shares (equity) and as you approach retirement, the money built up in the fund is moved to “safer” investments – like money market or bond funds.
The rational behind this philosophy is that the trustees of the pension fund don’t want your capital to decrease close to retirement.
The problem is that most people live much longer nowadays. At the age of 60, you may still have many years of kick left in you. Perhaps even 30 years, or more. In other words, at the age of 60 you still have a long investment horizon.
A skilled financial advisor will tell you that you need a lot more equity in your portfolio when you turn 60, for your money to last until age 90 or 95, than these pension and provident funds will provide.
The life stage strategy is a one-size-fits-all investment strategy, but unlike socks, one size does not fit all when it comes to financial planning.
It is probably not in your best interest to only be invested in such a fund. Pension fund trustees never do financial planning on your behalf, all that they are interested in is handing over a sum of money to you, on the day you leave your employment.
Your Financial Plan
Make sure you understand all the pros and cons of the investment strategy used by your pension or provident fund, and make make sure it fits in with your overall financial plan.
If the pension fund provided by your company does not meet all the requirements of your financial plan (which it probably wont), it’s up to you to take the necessary steps and make additional investments.
Today’s Financial Freedom Quick Tip was contributed by Gerrit Viljoen, the guy who taught me most of what I know about money. You can find out more about Gerrit and his company on the Ultima Financial Planners website.
