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Dr Sarah Mbeki is everything you’d expect from a successful professional heading into retirement. She was a specialist surgeon, responsible for a team of 20, and made life and death decisions daily at the hospital where she worked. Yet when it comes to her retirement planning, she’s made every mistake in the book.
She accepted her financial advisor’s product recommendations without questioning the funds she would invest in or the fees she would pay. She chose a guaranteed annuity because it “felt safer” without understanding the inflation risk. And she’s paying nearly 3% annually in costs on investments that consistently underperform the market.
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Sarah isn’t alone. Some of the smartest, most successful people make surprisingly poor retirement planning decisions.
The question is: why?
Some of the most pertinent reasons are the following:
- Overthinking simple decisions
Just because retirement planning involves large sums of money doesn’t mean it’s incredibly complex. The most effective retirement strategies are often the simplest ones.
- Not understanding that advice fees are just the beginning
All these fees vary, but let’s say you’re quoted around 1% in advice fees, which sounds reasonable. Now remember, this is on top of investment management fees (often around 1.5%), administration fees (around 0.25%), and various other charges. Suddenly, you’re paying close to 3% annually in total costs.
Furthermore, many advisors earn higher commissions for selling certain products. The investment that’s best for your advisor’s income might not be best for your retirement outcome.
- Not understanding how high fees compound negatively
That seemingly modest 2.5% to 3% annual fee doesn’t just reduce your returns by that amount – it compounds against you for decades. We did the maths: over 40 years, a small, 0.5% difference in fees could mean 21% less money. How much are you paying again?
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So, get to know your product options …
What decision has the biggest impact on the success or otherwise of your retirement?
Choosing between a living annuity and a guaranteed annuity.
Are guaranteed annuities safer?
Smart people often choose guaranteed annuities because they think it may ‘eliminate risk’. But they’re actually swapping market risk for inflation risk (while their kids lose out on an inheritance). A fixed income that seems comfortable today becomes inadequate when inflation erodes its purchasing power over 20+ years.
Aren’t living annuities just much more flexible?
Conversely, those who choose living annuities often underestimate the discipline required. They focus on the flexibility, growth potential and financial legacy implications but fail to set sustainable drawdown rates or select appropriate investments.
Did you know you can use the 10X Living Annuity Calculator to do your retirement sums?
Understand your fees …
For many retirees, living annuity fees are their single largest expense, often exceeding even medical costs. Yet these intelligent people who scrutinise every other major expense often have no idea what they’re paying in investment fees.
Know your fees! Use the 10X Effective Annual Cost calculator.
Consider this real-world example: A retired executive with R6 million in retirement savings draws 4% annually (R240 000). If he’s paying 2.5% in fees, that’s R150 000 per year – R12 500 per month – going to service providers. He’s paying his investment providers more than many South Africans earn.
Don’t listen to investment industry rhetoric
People often gravitate toward complex-sounding investment strategies because they assume sophisticated problems require sophisticated solutions. This leads them to exotic active fund management and overcomplicated asset allocation.
They pay premium fees for fund managers who claim they can beat the market despite overwhelming evidence that most active managers underperform low-cost index funds over the long term. Instead of simple, diversified portfolios, they create complex structures with multiple overlapping funds, often paying higher fees for no additional benefit.
Did you know the 10X Your Future Fund is designed to deliver cost-effective exposure to a wide range of local and international asset classes, targeting long-term outperformance against benchmarks and comparable funds?
Smart questions that change everything
- What exactly am I paying in total fees?
Don’t accept vague answers. Demand a specific effective annual cost (EAC) figure that includes all fees, charges, and expenses.
- How does this fund’s net performance compare with alternatives?
After all fees, how has this fund performed versus low-cost index funds?
- What happens if I live to 95?
Will your retirement income strategy work if you live 10 to 15 years longer than expected?
Show me the maths on drawdown sustainability
How long will your money last at different drawdown rates, fees, and inflation levels? What if performance isn’t as good as you think it will be?
Simple solutions for smart people
You might want to consider a retirement strategy that is embarrassingly simple:
- Keep fees below 1% annually through low-cost index funds.
- Maintain growth exposure throughout retirement with an equity allocation.
- Set sustainable drawdowns of around 4% annually, including all fees.
- Focus on long-term consistency rather than short-term performance.
The retirement you deserve might be easier to achieve than you think.
The content herein is provided as general information and does not constitute financial advice. 10X Investments is an authorised FSP (number 28250). The 10X Living Annuity is underwritten by Guardrisk Life Limited. Scenarios discussed are for illustrative purposes only.
If you found the above video helpful, you can get more industry-leading insight and actionable, retirement-focused content on the Rands&Sense by 10X Hub.
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