The Hidden Power of Unit Trusts in Retirement Planning

• Have you ever considered whether your current financial plan will support your desired standard of living in retirement?

• Are you concerned that your existing retirement scheme may not be sufficient in fulfilling your future needs?

• Or, are you self-employed without a retirement plan in place?

If any of these questions resonate with you, this article by KAMOGELO MAHUPELA is a must-read.

Planning for retirement is a significant financial challenge that most Batswana face, which often involves balancing the need for financial security in the future with the desire to enjoy life in the present. While traditional retirement funds are essential components of retirement planning, they may not always be sufficient to ensure a comfortable retirement. This is where unit trusts come into play, offering a strategic opportunity to set you up for the future or supplement your existing retirement scheme.

In this article, we explore how investing in a unit trust can be a strategic addition to an existing retirement scheme for those who are formally employed. For the self-employed and employees on contracts, it presents a compelling alternative to traditional retirement savings options.

We explore how unit trusts can provide both diversification benefits and growth potential, enhancing financial security for those looking to secure their future, regardless of employment status.

Unit trusts are an affordable and ideal investment vehicle for diversifying your retirement portfolio.

By pooling your money with other like-minded investors, they offer access to a wide range of assets, such as:

• stocks,

• bonds,

• property, amongst other asset classes.

Diversification helps spread risk and reduces the impact of market volatility on your investments, providing greater stability and security for your retirement funds.

Unit trusts are managed by investment professionals who make informed decisions about asset allocation, buying and selling securities, and portfolio management. This level of expertise can be particularly beneficial for investors who may not have the expertise or time to actively manage their retirement investments.

Unit trusts provide a valuable opportunity for your retirement savings to grow through the power of compound interest. Over time, the returns earned on your investments are reinvested, leading to exponential growth. This compounding effect can significantly boost the value of your retirement funds while helping you achieve your financial goals.

Many unit trusts offerings have the option of regular income distributions, which can be attractive for retirees.

These distributions can provide a steady stream of income to supplement other retirement income sources, such as:

• Annuity payments (pensions) or

• Social grants.

  The additional income can help maintain your desired lifestyle during retirement.

Unit Trusts are accessible to all types of investors, regardless of their income status or net worth. You can start with a relatively small investment, making it an affordable option for those looking to supplement their existing retirement schemes. This accessibility makes unit trusts an all-inclusive and convenient choice for retirement planning.

To use a simplified example of how you can use unit trusts to augment your retirement plan:

Meet Katlego, a 58-year-old Retiree who has just started enjoying her retirement benefits. Thirty years ago, Katlego made a decision to augment her current retirement plan with her employer, with personal unit trusts investments.

She began by researching various unit trusts offerings and consulted with a financial advisor to select one that aligned with her long-term investment goals and risk appetite. Katlego chose to start off by investing in a well-diversified medium to high-risk unit trusts fund that primarily invests in a mix of stocks and bonds, as it matched her risk appetite and investment horizon at the time.

The chosen unit trusts fund is diversified across various asset classes, spreading the risk accordingly. Katlego committed to making monthly contributions of P3,000.00 into her unit trusts account.

These contributions were deducted automatically from her bank account, which ensured consistency in her investment contributions and benefitted from Pula-cost Averaging effect by lowering the average purchase cost of units over time.

Diversification helped reduce the impact of market volatility on Katlego’s investments and provided a more stable and consistent growth trajectory. Katlego’s unit trust generated returns through dividends paid from stocks, interest from bonds, and capital gains from the fund's underlying assets.

She chose to reinvest her earnings rather than taking them as cash, which helped accelerate the growth of her investment over time.

After 25 years, with monthly contributions of P3,000.00 and an average annual rate of return of 9.6%, the value of Katlego’s investments amounted to approximately P1,4 million.

Katlego regularly reviewed her unit trusts’ performance with guidance from her financial advisor. Given that she was closer to retirement, she sought advice to switch to a more conservative unit trusts fund to protect her gains and reduce risk.

With only 5 years to retirement, she chose to invest her P1,4 million in a local money market investment fund earning approximately 5.6% per annum on average. After 5 years, her investments grew to nearly P1,8 million.

Graphics are the copyright of the author

Throughout her investment journey, Katlego remained committed to her long-term investment horizon, understanding that the value of her investment would fluctuate over the years.

She did not panic during market downturns, knowing that her diversified portfolio was designed to withstand short-term market fluctuations.

The above illustration demonstrates that by consistently investing in a unit trust fund with a long-term perspective and commitment to regular contributions and reinvestment, and minimizing withdrawals from your investment, you can successfully build your own retirement fund over time.

The example illustrates the potential benefits of using unit trusts as part of a well-planned retirement strategy.

It is important to note that all investments carry some level of risk, and individuals should consult with financial advisors and carefully consider their investment goals and risk tolerance when planning for retirement.

Katlego could clearly afford to part with P3,000 on a monthly basis. While P3,000 may be a challenge for some, it is important to note that you can start building your retirement plan with as little as P200, through the Bifm Unit Trusts.

As your financial situation improves, you can easily increase your contributions over time to meet your end goal.

Katlego had 30 years to build her sizeable retirement wealth. You may not have this much time, but it is never too late to take a significant step toward ensuring a more comfortable and secure retirement.

While traditional retirement schemes are crucial components of retirement planning, they may not always provide sufficient security and growth potential on their own. Unit trusts offer a complementary solution that can help you achieve your retirement goals more effectively. They have the hidden potential to enhance your financial security during your golden years.

*The views expressed in the article are those of the author. Mahupela is the Client's Relationship Officer at Bifm, an asset management company.