Question:
Each month I put 20 percent of my gross salary into my retirement annuity while my wife invests only 10 percent into hers. She reckons I should live a little and save less; I reckon she should think of the future and save more. Who is right?

Answer:
Of all the financial arguments I have come across between spouses, this has got to be the 'healthiest' of the lot. 'How much should I be investing', is the million dollar question that has challenged the minds of every investor in their retirement preparation. Of course, there is many a mathematician and actuary standing in line to give one the definitive numerical answer.

Truth is, 'how much' is a relative term and therefore any generic numerical answer stands the overwhelming chance of being spectacularly wrong. In addition to this, there are a number of influencing factors that impact on this that need to be dealt with before we explore any percentage.

One of the most fundamental questions that investors overlook is that of how they want their money to fund their lifestyle both now and in the future. Essentially, there are four areas that that affect your quest to reaching financial independence:

• how much you save now;

• when you wish to retire;

• how much you spend later (after retirement);

• expected returns

Each of the permutations of the above areas will significantly impact on the 'percentage of gross income' needed in what is known as the accumulation phase of your life. Each of these factors is inextricably interlaced and worthy custodians of some of investment's most powerful truths.

The question of how much one is currently saving leads to the obvious principle of 'cost of delay'. What this principle highlights is the benefit of starting early through the power of compounding interest. This will, in turn, have a direct link with the question of when one wishes to retire as the accumulation phase is either shortened or extended in accordance to when one wishes to retire in relation to the 'default' age 65.

To illustrate the power of compounding, let’s assume two people with the exact same age, income and retirement expectations. Investor A contributes from today for 10 years and then stops. One the flip side, investor B does not contribute until 10 years from today. Investor A’s fund value continues to grow while Investor B attempts to 'catch up'. To arrive at the same value as investor A, he will have to contribute the same premium for 33 years. In other words, starting 10 years earlier can save you 23 years of contributions purely by harnessing the power of compounding interest.

How much one wishes to spend in retirement is paramount in establishing one’s capital requirements and once again is interdependent with the aspect of how much you are saving and when you are needing this capital to start working for you. This leaves the final aspect being the expected returns. One of the key drivers of investment returns is sound asset allocation. This is a process of understanding what the different asset classes are, what they offer in terms of returns and how they are likely to behave.

In essence, the higher the exposure to growth assets (equities and property) the higher the expected volatility and long term returns. Conversely the higher the exposure to protection assets (bonds and cash), the lower the volatility and ultimate returns. Of course, every investor’s utopian dream is to have earth shattering returns with no risk. In reality, this will never happen. Market risk centres on volatility and is predominantly a short term phenomenon which means that 'risk' is negated the longer one is invested. What it comes down to is a trade off between 'eating well' from sound long term returns and being able to 'sleep well' in all market conditions. This sweet spot will be as a result of a suitable combination of growth and protection assets.

So where does this leave you? Well, it either means that you are both right, both wrong and anywhere in between. The only person who holds the answer to this question is yourself and the only way you are going to gain clarity on a definitive numerical percentage is to first ask what you want your money to achieve for you both now and in the future.

All the best.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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