When we look at planning for retirement, most employers provide their employees with pensions, provident funds and/or retirement annuities. Unfortunately, it is often assumed employees know what these are – however with all the jargon associated with them, this is often not the case.
So, let’s take look at retirement planning from a different perspective. Instead of pensions, let’s assume an individual decides instead to invest his savings during his life into building up a herd of cattle. Each month this person takes their savings and buys a cow and moves them to a farm they own to allow them to graze and prosper. Each cow represents a unit of wealth, steadily growing over the years through careful breeding and management. For this farmer, retirement planning means building a sizable herd, envisioning a future where he can gradually sell off his cattle to fund his golden years.
In the ideal scenario, the farmer’s herd acts as his retirement nest egg. With each sale, he reaps the rewards of his lifelong dedication to cattle farming, providing for his needs and securing his legacy. The strategy seems straightforward: invest in cattle, watch the herd multiply and enjoy a comfortable retirement.
However, the life of a cattle farmer is not without its challenges. Just as the farm endures droughts and predators, the farmer faces a myriad of risks that threaten his retirement aspirations. Droughts diminish grazing lands, soaring feed costs strain finances, and the danger of stock theft looms over the herd. In addition, when he retires, lower cattle prices might mean he has insufficient cattle to meet his financial obligations.
In the face of these perils, the prudent farmer must adopt risk management strategies. Investing solely in cattle exposes him to significant vulnerability. A single drought or theft could decimate his wealth, leaving him destitute in his twilight years. Diversification becomes essential – spreading risk across different assets to mitigate the impact of individual setbacks.
In essence, pensions and retirement annuities are no different to the herd of cattle. An individual puts money into these each month and the invested assets earn a return and hopefully grow so that on retirement, the individual has sufficient funds to live off.
The benefit of using pensions and retirement annuities is the ability for an individual – through the firm he is using – to better diversify the risk by investing in different asset classes and changing the risk as he gets closer to retirement.
It is important to try and use the analogy of the cattle farmer to better understand one’s retirement savings. It is not rocket science. All we really need to do is answer the following questions:
- What do I need at retirement (how many cattle do I need to have so I can sell them on an ongoing basis to meet my daily needs and what do I think my daily needs will be)? This is your TARGET.
- How long am I still going to work for? How much do I need to save and for how long, in order to reach my TARGET (how many cows can I buy each year and for how long? What natural growth in the herd can I reasonably assume)? What do I need to SAVE?
- What could go wrong and how can I manage this (what might kill my cattle and how do I protect them)? What is the RISK?
- If what you are SAVING is not enough to reach your TARGET, what are your other OPTIONS?
We are here to help you answer these questions and plan for your retirement as prudently and effectively as possible. For more information chat to a member of the team today.
HRTorQue Financial Services is a registered financial service provider – FSP number 52068