By: Duma Mxenge
Could exchange traded funds be South Africa’s next big retirement trend? As people plan for retirement, exchange traded funds (ETFs) can be a smart choice. They are liquid, cost-effective, and an easy way to diversify your investment portfolio. ETFs can be a great addition to your long-term savings or retirement plans, working alongside your regular retirement fund.
While traditional retirement products give you a steady income, standalone ETF investments can provide extra cash when you need it.
What is an ETF?
An ETF is a collection of securities that follows the performance of an underlying index, like the FTSE/JSE Top 40 Index, or an asset class such as property. After identifying your risk profile and selecting a suitable ETF or combination of ETFs to match your profile, you can make a lump-sum investment or automate your monthly investing through a recurring investment.
Continuing to do this over the long term allows you to benefit from rand cost averaging, which means that your money buys more units when markets are down and fewer when they are up. This approach helps to reduce the overall cost of your investment over time.
How do I choose the right ETF?
If you're investing on your own, knowledge is crucial. It's essential to know your goals and timeline when investing. Decide if you’re saving for the long term or need to access funds sooner, as different ETFs focus on growth or income. Understanding your risk tolerance is also important — higher returns often come with higher risk, but if you prefer stability, there are more conservative ETFs available.
Retirement planning
Saving for retirement is essential, regardless of your current career plans. Starting early allows you to save a manageable amount, as the sooner you begin, the less you’ll need to contribute monthly to reach your retirement goals.
Life can be unpredictable, so building up savings offers peace of mind and options for the future. In a rapidly changing work environment, having savings allows you to adapt to new opportunities without financial stress. Additionally, as we live longer, we must consider the rising medical costs that come with age, making it even more important to prepare for retirement.
How can ETFs help my retirement savings?
Having flexible, liquid investments is wise. Options like Tax-Free Savings Accounts (TFSAs) and ETFs can help supplement your retirement savings while providing easy access to cash.
ETFs and unit trusts are considered liquid investments, allowing you to access funds when needed. However, the longer you hold them, the more you can benefit from growth. It’s smart to match your investment goals with the right products — for example, a conservative ETF for short-term needs and a growth-oriented ETF for longer-term savings.
Imagine you start investing R5 000 each year (into a fund that tracks the FTSE/JSE Top 40 Index) from the age of 25 and continue until you’re 65. Over the 40 years, you would have contributed a total of R200 000 (that’s 40 years of R5 000 contributions). With an annual return of 13%, by the time you reach 65, your investment could grow to around R5 million. To put this into perspective, the Satrix Top 40 ETF has delivered a 20-year annualised return of 13.42%, making this level of return a realistic target based on past performance.
With the Two-Pot Retirement System now in place, you can withdraw a portion of your retirement savings before the official retirement age. This new system divides your savings into three components: savings-, retirement-, and a vested component.
The savings component allows you to access funds annually, while the retirement component locks in savings for your retirement. By incorporating ETFs into your savings strategy, you can enhance your financial flexibility. Having additional liquid investments, such as ETFs, means you may not need to rely on the savings component, allowing your long-term retirement savings to grow more effectively.
How do I get started?
To start investing in ETFs, follow these tips:
Start Small: Just start the journey, even if you’re investing R100 a month.
Be Consistent: Regular investments help take advantage of compound growth.
Use Available Resources: Take advantage of educational materials online. Don’t be afraid to get a ‘squad’ of professionals on your side to help you get the foundations in place.
Seek Professional Advice: A financial adviser can help create a strategy tailored to your needs.
Review and Adjust: Regularly check your investment strategy and adjust if your goals change.
Starting your financial and retirement planning early is essential. While a financial adviser can help you develop a personal savings strategy, consider combining retirement products with liquid investments. ETFs provide both flexibility and diversification, making them an excellent choice for retirement planning. Remember to focus on long-term growth and review your investment strategy at least once a year.
* Mxenge is the head of business and market development at Satrix.
PERSONAL FINANCE