Future returns in your RA?

If you’re like all of us, you’ve caught yourself doing a quick calculation of what your future returns in your Retirement Annuity might look like. Usually, one would try work backwards from a “comfortable amount” to try figure out how much you need to start putting away to reach your goal amount.

Unfortunately, such a simple calculation of wanting a million rand for your retirement may end up misleading you from the reality of the situation. The reality we are missing here is inflation. Simply put, inflation is best described like this; each year the cost of goods and services increases and in turn this decreases the buying power of your money.

Imagine this, 25 years ago McDonalds opened its first restaurant in South Africa and the price of a Big Mac was R20. For arguments sake, let’s say your goal was to be able to buy yourself a Big Mac in 25 years’ time with the R20 you have saved. Fast forward to 2022 and the price of a Big Mac is now R40.00 (give or take a few cents), the price has essentially doubled and decreased your buying power. The same analogy needs to be applied and taken into consideration when you are preparing and calculating your future returns on your retirement savings because, the exact same thing will occur whether your goal is R20.00 or R1m.

It is for this reason that your main goal (aside from your target amount) should be to beat inflation through the years. Leaving your money in a bank and earning interest is seen as the safer option to most people. However, safer does not always mean it is good for you. Interest rates rarely (if ever) beat inflation due to the nature of their relationship. In theory, inflation and interest rates are in an “inverse” relationship. What this means is that, when interest rates are low, inflation tends to rise and when interest rates are high, inflation tends to fall. Do I need to mention that since the beginning of the pandemic South Africa interest rates have been at an all time low?

The conventional method of saving is quickly being replaced by investing. Investing your money gives you ample opportunity to increase your wealth and look down on inflation. With investing, you are given the opportunity to decide how much risk you want to take on to outgrow inflation and grow your retirement savings.

Happy investing!

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