From the ed­i­tor

JANA MARAIS

Finweek English Edition - - CONTENTS -

Two re­search re­ports caught my eye this week – both with a con­cern­ing mes­sage for in­vestors. The first one – San­lam’s lat­est an­nual Bench­mark sur­vey on re­tire­ment – found that only 35% of pen­sion­ers be­lieve they have saved enough for re­tire­ment, and nearly half of cur­rent re­tirees (48%) ex­pe­ri­ence a short­fall be­tween in­come and liv­ing ex­penses each month.

That South Africans don’t save enough for re­tire­ment can’t be news for any­one – we are well aware of the savings pit­falls, such as cash­ing in re­tire­ment savings when chang­ing jobs. But it may be time to start pay­ing more at­ten­tion to get­ting our fi­nan­cial houses in or­der.

A new study by the McKin­sey Global In­sti­tute (MGI) warns that in­vestors may need to lower their ex­pec­ta­tions. De­spite painful mar­ket crashes like 2000’s dot-com bub­ble and the 2007/08 global fi­nan­cial cri­sis, the past 30 years were in fact the golden years for in­vestors, with re­turns on equities and bonds higher than the long-run trend, the In­sti­tute says.

Be­tween 1985 and 2014, real to­tal re­turns for eq­uity in­vestors in the US and Western Europe av­er­aged 7.9% – or re­spec­tively 1.4 and 3 per­cent­age points higher than the 100-year av­er­age, MGI said. A num­ber of fac­tors drove these ex­cep­tional re­turns: sharp de­clines in in­fla­tion and in­ter­est rates; strong global GDP growth, driven in part by China’s phe­nom­e­nal growth story; and even stronger cor­po­rate profit growth thanks to rev­enue from new mar­kets, de­clin­ing cor­po­rate taxes, and ad­vances in au­to­ma­tion and global sup­ply chains that con­tained costs, ac­cord­ing to the re­port.

In short, it will be very hard to repli­cate this per­for­mance over the next 20 years. In a slow-growth sce­nario, to­tal real re­turns from US equities over the next 20 years could av­er­age 4% to 5% – more than 2.5 per­cent­age points be­low the 1985-2014 av­er­age, MGI es­ti­mates. The stats may be for US equities, but given the cor­re­la­tion be­tween the JSE and the S&P500, for ex­am­ple, we should also pay at­ten­tion.

What does this mean for in­vestors? Peo­ple will have to save more for re­tire­ment, re­tire later, or re­duce their spend­ing dur­ing re­tire­ment, MGI says. To il­lus­trate: in or­der to make up for a 2 per­cent­age point dif­fer­ence in av­er­age re­turns, a 30-year-old would have to ei­ther work seven years longer, or al­most dou­ble their sav­ing rate to achieve the same re­tire­ment pot. A tough ask for South Africans who are al­ready fall­ing far short on the savings front.

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