Blundering into the sunset

We've all probably heard the saying sometime in our lives: "Failing to plan is planning to fail."

We've all probably heard the saying sometime in our lives: "Failing to plan is planning to fail."

This is absolutely true when it comes to not planning for your retirement. So, what should a plan involve?

Rob Macdonald, head of Xchange Solutions at Nedbank, says a comprehensive financial plan has three legs to it: an investment strategy, risk management and succession planning.

He says you could have the greatest investment strategy in the world, but if you don't manage your risks effectively, such as providing for your own disability or the death of a spouse, your dreams of a comfortable retirement could be shattered.

A risk management plan is an important element in helping you make it to retirement.

Succession planning is also critical. It can ensure that, for example, if you die before reaching retirement age, your loved ones are well looked after.

"If you make it to 90, succession planning can help ensure you leave some inheritance for your grandchildren, however big or small," says Macdonald.

"Obviously, you won't live comfortably after retirement without a sound investment strategy."

The starting point for any investment, he says, is to have very clear objectives for what you are trying to achieve.

You need to be very clear as to how much money you will need to live when you retire.

Macdonald quotes Warren Buffett, the world's most successful private investor. According to Buffet, "to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

"What Buffet is telling us is that being human can be dangerous for your wealth," says Macdonald.

According to Buffett, people often respond emotionally to their investments, worrying about whether they are performing better or worse than other investments.

"We like to compare," says Macdonald. "We also like to chase the latest hot-performing fund or share. This is not making decisions with a sound intellectual framework."

Macdonald says the key steps in a sound investment framework are:

l Identify your objectives;

l Calculate the required return needed on your investments to achieve your objectives.

Make sure this return is benchmarked against inflation. Remember, you can't beat inflation consistently over the long-term by more than 6 to 7percent;

l Invest in a diversified portfolio of regulated, transparent assets;

l Monitor and review your strategy on a yearly basis; and

l Change your strategy only when your personal circumstances or objectives change, not when the investment markets go up or down.

"Remember, investment markets always go up and down and so do your emotional responses," says Macdonald.

"Stick to your investment framework when making decisions and give yourself the best chance of retiring comfortably.

"Sometimes this is difficult to do on your own. In fact, most of us need the help of a good professional financial adviser who can help us quantify our goals, set and implement our strategy and coach us through the highs and lows of investment markets."