How to en­sure you have built an ad­e­quate nest egg

Know­ing what your op­tions are is quin­tes­sen­tial

Mail & Guardian - - Irfa - Alf James

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.

This is ac­cord­ing to Nick Brum­mer, di­rec­tor at In­ve­ston­line, who says that the 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 ‘wealth­pro­tect­ing’ in na­ture,” he ex­plains.

Another thing that Brum­mer says 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.”

Brum­mer ex­plains the ba­sic dif­fer­ences be­tween these two types of an­nu­ities.

“In the case of a guar­an­teed (sin­glelife) 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.”

With re­gards to ef­fec­tively man­ag­ing your liv­ing an­nu­ity, Brum­mer says that us­ing an ap­pro­pri­ate re­tire­ment plan­ning tool or con­sult­ing with a qual­i­fied fi­nan­cial ad­vi­sor will en­sure that an in­vestor gets the so­lu­tion most ap­pro­pri­ate for them.

“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, Brum­mer says that 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 re­bal­ance their port­fo­lio an­nu­ally to en­sure their in­vest­ment stays on track and pos­si­bly even con­sider de­lay­ing re­tire­ment by a few years.”

Brum­mer em­pha­sises that 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.

Nick Brum­mer, Di­rec­tor at In­ve­ston­line. Photo: Suzette Vorster

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