A few weeks have passed since the political drama that unfolded which caused South Africa’s sovereign risk downgrades to junk status by key ratings agencies, S&P and Fitch. It is clear that tough economic times lie ahead, says Deane Moore, CEO of Just – so what retirement strategies should South Africans consider to navigate their finances amidst the storm?
“Most South Africans tend to put their money into lower risk investments 10 years ahead of retirement to protect their hard-earned retirement capital and not lose any money as a result of volatile market conditions,” adds Moore. “What you should consider doing is to choose your retirement solution early and not at retirement. Assess how much capital is required to sustain your retirement strategy and allocate your assets accordingly to achieve this goal.”
Moore says that South Africans should consider how much capital they would need for retirement after they have taken all their liabilities into consideration. This includes daily living expenses and financial commitments such as credit card payments, loan repayments and others. The capital requirement and how much one has actually saved will then determine the best investment strategy to follow at retirement.
At retirement it is important that your basic living expenses and income are guaranteed for the remainder of your life.
“Retirees should consider how much income they need to survive on. Retirement is not the time to start gambling, so make sure you get this level of income guaranteed for life, regardless of what happens to investment markets,” reiterates Moore.
As an example, a with-profit annuity providing a guaranteed income for life, targeted to increase with inflation, will provide starting income (expressed as a % of assets invested) of approximately:
- 5,5% (married couple, male 65, female 62);
- 6,5% (single female, age 65);
- 8,0% (single male, age 65)
This is high relative to the recommendations of the Association of Savings and Investments South Africa (ASISA) to achieve a sustainable drawdown rate on living annuities, because these investments do not generally include any guarantee of sustainability over one’s lifetime.
For those retirees reaching their mid-70s who cannot live with the uncertainty of market turmoil and who have started eroding their capital, a guaranteed annuity for life may be more suitable.
Using the same example, a with-profit annuity providing a guaranteed income for life, targeted to increase with inflation, will provide income (expressed as a % of assets invested) of approximately
- 9,5% (married couple, male 75, female 72);
- 11,0% (single female, age 75);
- 14,0% (single male, age 75)
Until recently, retirees could not split their assets between a guaranteed annuity for life covering their basic needs and a portion into a living annuity to leave an inheritance for their loved ones. However, Just specialises in providing blended solutions through its new Just Lifetime Income solution, so that clients can enjoy the best of both worlds in retirement.
“Those in retirement and worried about consuming their capital should speak to their financial adviser to consider an option of living without uncertainty and drawing a guaranteed income for life,” says Moore.