A rainy-day fund shouldn’t eat into your fu­ture fi­nan­cial se­cu­rity

Financial Mail - Investors Monthly - - Contents -

Fac­ing re­tire­ment with in­suf­fi­cient sav­ings to main­tain a cer­tain life­style is a re­al­ity for more peo­ple than should be the case.

In the­ory, if you con­trib­ute to a com­pany pen­sion fund, and pos­si­bly put some money into a re­tire­ment an­nu­ity or unit trust, you should be able to at least get close to that goal.

Un­for­tu­nately, this ap­plies to too few peo­ple. This might be due to in­suf­fi­cient plan­ning, or sim­ply be­cause life in­ter­vened and money meant for re­tire­ment was di­verted else­where.

An­drew Dav­i­son, head of ad­vice at Old Mu­tual Cor­po­rate Con­sul­tants, says this is com­mon, which is why rainy-day sav­ings should be con­sid­ered as im­por­tant as re­tire­ment sav­ings.

“We re­alised you can’t fo­cus on one or the other — you have to make sure peo­ple have a com­pre­hen­sive plan in place that ad­dresses all their needs,” he says. “If you only fo­cus on one need, then the other needs aren’t catered for and sav­ings that are meant for a par­tic­u­lar need have to be di­verted to plug a gap else­where. This jeop­ar­dises the ini­tial need too.”

Dav­i­son sug­gests an ef­fec­tive re­tire­ment strat­egy is for in­vestors to al­lo­cate 15% of their pre­tax salary to re­tire­ment sav­ings. With a goal of achiev­ing in­vest­ment re­turns of CPI plus 5% each year, and pre­serv­ing sav­ings when chang­ing jobs, your chances of fi­nan­cial secu- rity in re­tire­ment are good.

For many, the years lead­ing up to re­tire­ment are crunch years in which they save fu­ri­ously to catch up on 20 or 30 years of neg­li­gence. But un­less they’re able to sig­nif­i­cantly in­crease their con­tri­bu­tions, they will be play­ing catch-up.

Al­lan Gray prod­uct de­vel­op­ment man­ager Daniel van An­del says shorter time hori­zons not only raise con­tri­bu­tions, but they may also mean in­vest­ing in higher-risk as­sets to get higher re­turns.

“There is no sil­ver bul­let,” he says. “This prob­lem re­quires a mul­ti­fac­eted ap­proach. We con­tinue to ed­u­cate clients on what they need to con­trib­ute, but it’s un­likely to be ef­fec­tive in and of it­self.”

Some­thing else to con­sider is the po­ten­tial ben­e­fit of de­lay­ing your re­tire­ment, even if only by a year or two, he says.

The legacy re­tire­ment age of 55 is one that all in­dus­try par­tic­i­pants see as the low-hang­ing fruit that can help in­di­vid­u­als achieve their re­tire­ment goals. This is par­tic­u­larly so due to longer life spans and be­cause many peo­ple can work well be­yond that age.

Change is tak­ing place, with some com­pa­nies ex­tend­ing their manda­tory re­tire­ment age.

How­ever, Van An­del says high­light­ing the need to stick to a re­tire­ment sav­ings strat­egy is im­por­tant too. This is even more so given that in­vestors now have greater con­trol over their re­tire­ment sav­ings.

“In the past, many in­di­vid­u­als saved for re­tire­ment in de­fined ben­e­fit schemes where there was no need for them to make de­ci­sions. While the trend to de­fined con­tri­bu­tion schemes has re­sulted in greater trans­parency and com­pe­ti­tion, in­vestors who are un­able to ac­cess good in­de­pen­dent fi­nan­cial ad­vice have been left to make im­por­tant fi­nan­cial de­ci­sions on their own,” he says.

“In­vestors’ growth as­set ex­po­sure while sav­ing for re­tire­ment is a case in point. Prior to the in­tro­duc­tion of reg­u­la­tion 28 [of the Pen­sion Fund Act, which lim­its how much may be in­vested in par­tic­u­lar as­sets], many in­vestors were in­vested 100% in eq­ui­ties, whereas now most in­vest in one or more ‘bal­anced’ funds. While bal­anced funds are gen- er­ally ver­sa­tile of­fer­ings, there is some­thing to be said for providers of­fer­ing so­lu­tions which en­able in­vestors to max­imise growth as­set ex­po­sure early on in their re­tire­ment sav­ings jour­ney.”

This point is taken up by Dav­i­son, who says he en­cour­ages in­vestors to in­crease their eq­uity ex­po­sure over a cashonly or cash-dom­i­nant po­si­tion.

“Cash is … ex­actly the op­po­site of what you per­ceive it to be,” he says. “Cash is con­sid­ered a safe op­tion, but it doesn’t gen­er­ate re­turns that are well above in­fla­tion. So though it might be the least volatile [in­vest­ment], it’s ac­tu­ally the riski­est in terms of achiev­ing your goals.”

The bat­tle to help peo­ple pre­pare for a post-work life is not new. And merely hop­ing the sit­u­a­tion will change is in­suf­fi­cient. But re­tire­ment reg­u­la­tion re­forms, and adap­ta­tion by fund man­agers and em­ploy­ers, may drive some progress on the is­sue. ●

“High­light­ing the need to stick to a re­tire­ment sav­ings strat­egy is im­por­tant too

Pic­ture: 123RF — DAVID FRANKLIN

Daniel van An­del … No sil­ver bul­let

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