Can you bridge your wealth gap?

Our Wealth Expectancy report 2019 shows that six out of 10 savers will fall short of their retirement aspirations by 50 per cent or more

Research shows most retirees fall short of their income and wealth goals. The ‘wealth expectancy gap’ arises in part from our failure to assiduously plan for our financial future. It is clear that the sooner we start saving (and investing), the faster we will reach our aspirations.

Let’s take the example of an 18-year old who enters the workforce and starts saving US$2,000 a year for the next seven years till she is 25 and puts the savings in global equities (that have historically compounded at a rate of 10 per cent a year). Just by saving US$14,000 in the first seven years of her working life, she is set to become a dollar millionaire by 66.

By comparison, somebody who starts later at say age 26 will need to save US$2,000 every year from the age of 26 to 66, or more than US$80,000 over 40 years, in order to become a dollar millionaire by 66, assuming the same compound rate.

Make your money work harder

Most people use savings accounts to grow their wealth, which is understandable given the security they offer. However, the ‘real’ returns on these savings after inflation can often be disappointing compared to investments.

When making investments, it is critical to diversify across several different products to preserve capital and protect against risks.

Insurance solutions, such as annuities and endowments are a popular way to preserve and grow wealth. These products, which are typically long-term in nature, offer defined returns after a certain date. But there is a trade-off between certainty and flexibility – you can’t access them easily in times of emergencies.

Diversified investment portfolios boost returns

To achieve a balance between certainty and flexibility, an allocation to a diversified basket consisting of stocks, bonds and precious metals is the way to go. These assets are more interchangeable than the usual insurance products and you can use them to fund expenses that arise over the course of life, such as children’s education, weddings and health emergencies. For those who can, diversifying investments internationally help spread the sources of risk.

Research carried out over multiple market cycles shows diversified investment baskets are key to boosting overall returns. Historically, stocks have delivered higher returns than bonds. So, for example an investment basket split equally between stocks and bonds (savings accounts) would provide a higher return over an extended period than money parked in a savings account.

Usually when deciding the split between stocks and bonds, it works to put a larger share of your capital in stocks during the early part of your working life, when you can take relatively higher risks. As you get closer to retirement, the need for wealth preservation becomes increasingly important, so you invert the ratio in favour of bonds. Of course, you also need to consider the stage of the market and business cycle we are in and the current bond yields on offer, in order to fine-tune the ideal allocation.

In conclusion, securing your financial future starts with a well-thought-out plan, mapped to your life goals. The next important step is to save and invest early. Finally, by diversifying your wealth across various investment solutions, you have the potential to generate better risk-adjusted returns, putting you on the path to a worry free retirement.

Read our 2019 report on wealth expectancy.