While investors are constantly reminded to take a long-term perspective when it comes to saving for retirement, the years leading up to retirement should become less about wealth creation and more about wealth protection – whether it be protection from volatility in the market, inflation risk, or just a bout of bad luck.
Effective management of investments during the “danger zone” years leading up to retirement, is crucial to ensuring a financially secure retirement. Saving for retirement is about addressing the right risks at the right time. Younger investors, whose most pertinent risk will likely be related to whether they have enough scope for capital appreciation, are able to take on additional risk and should therefore be investing a large portion of their wealth into growth assets. This propensity for risk, however, should decrease in the years approaching retirement.
This is because when you are younger, you are usually taking a very long-term investment view, particularly with regards to retirement, and should not be overly concerned about short term volatility, as the majority of this is likely just noise. As you get older, however, the risk of wealth erosion increases and, as a result, your investment strategy should gradually shift from being ‘return-chasing’ towards being increasingly ‘wealth-protecting’ in nature.
Another issue investors need to consider when nearing retirement is the management of their retirement fund proceeds. As a member of a South African retirement annuity or pension fund, you are not allowed to take more than one-third of your proceeds as a cash lump sum (unless the fund value is less than R247 500), and must buy an annuity with the balance.
While the option of a cash lump sum will confer certain tax advantages, in that the first R500 000 is tax-free, this will reduce the amount of retirement fund proceeds you have available to purchase an annuity – which can either be a guaranteed/life annuity or a living annuity.
In the case of a guaranteed (single-life) annuity, your insurer will pay a specified monthly pension for the rest of your life. The major drawback here is that your capital dies with you, and no money is passed onto your heirs. A living annuity, on the other hand, transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and the capital in your living annuity will pass to your nominated beneficiaries if you die.
Your living annuity can be invested into any top-performing unit trusts available on the Investonline platform and we are able to assist you with selecting the best suite of unit trusts to ensure that they match your specific risk profile and individual needs.
Upon reaching retirement, an investor’s risk profile will shift once more, with longevity risk taking centre stage. Protecting yourself against longevity risk – the risk of outliving your nest egg – will become the biggest risk you face in your retirement years. It is therefore essential that investors review their portfolio annually to ensure their investment stays on track and possibly even consider delaying retirement by a few years.
One of the most important things that an investor can do to protect their nest egg as they near retirement, is to ensure that they know what options are available to them. Getting the right advice and assistance can go a long way in planning for your retirement.