When we read the financial press, we are constantly told that successful investors focus on the long-term when it comes to making decisions that affect their portfolios.
The table below illustrates how the impact of decisions made with short term considerations in mind can later cost the investor dearly.
Let’s take the example of Sam and Linda below. Sam and Linda joined their employer at the same time and earned the same packages during their employment. Unfortunately, the employer ran into severe financial difficulties when they were 45 years old and they were both retrenched. At the time of their retrenchment the value of their pension interests was R1,500,000.
At retrenchment, Sam decides to withdraw and spend his full interest in the pension fund, whilst Linda only withdraws and spends R100,000 transferring the balance of her interest to a Pension Preservation Fund.
A year later they were both hired at new jobs and began to contribute R2,000 per month to a Retirement Annuity, increasing this amount by 10% annually. At 60 they both reached the company’s retirement age and had to retire.
As you can see, Sam’s short-term decision to take what was left of his hard-earned pension interest when he was retrenched and spend it, had a massive impact on what was available to him at retirement a mere 15 years later. Plus you can see that he had to pay a whack of tax.
Linda, on the other hand, was rewarded for taking a long-term view at retrenchment. She drew the minimum cash that she could afford and preserved the balance for when she needed it.
There are investors who are now facing similar choices. We would argue that by focusing on what you can get now in the short-term will leave you much poorer when you really need the investment later on.
By the time that you reach your retirement, what decisions would you have wished that you had made along your investment journey?
Note: this example is for illustrative purposes only. Obviously personal financial circumstances must always be taken into account in order to make informed decisions. This is where enlisting the help of a qualified and experienced financial planner can be essential.
That is what we are here for.
Do get in touch if you need assistance or advice on managing your investment portfolios or any other aspect of your financial plan.