Make retirement funds last longer

Placing an investor in a life stage model almost guarantees that investors won’t save enough – Marc Thomas.

It’s now known that most South Africans don’t save enough for retirement. But Marc Thomas at Bridge Fund Managers says they may have just been exposed to inappropriate strategies.

Placing an investor in a life stage model almost guarantees investors won’t save enough, he argues, as when investors have the most capital and the potential to earn decent after-inflation returns, they won’t have enough exposure to growth assets.

Here are alternatives to improve the probability of pensioners’ money lasting:

1. Reassess your return profile

Instead of keeping a significant chunk of capital in growth assets for as long as possible, and living off the income, retirees tend to move all their capital into cash, locking in a low return. In reality, many investors still need a significant exposure (often 55%-60%) to growth assets to protect against inflation, says Pankie Kellerman at Gryphon Asset Management.

The first five years in retirement are crucial – investors need a significant exposure to growth assets then and to live off the minimum possible, he says.

Thomas argues tilting the portfolio to get more return from income than capital could also help.

Income-efficient portfolios aim to limit capital drawdown from the portfolio and produce adequate dividends, income and interest to meet the pensioner’s income requirements, while growing the underlying capital over time.

2. Lower your fees

Kellerman says people with limited retirement savings, can’t afford excessive fees. On a R1 million retirement capital amount, every additional 1% in fees is significant, and may not be accompanied by excess returns.

Thomas says when all LA costs are considered, many clients are paying between 2%-3% in fees – unsustainable in a low-return environment.

In an LA’s fund portion, two significant contributors to fees are global funds and performance fees.

3. Don’t take inflationary increases initially

Many retirees find it hard to reduce their drawdown rate at the start, but not taking increases in the first few retirement years lessens stress in the portfolio and effectively lowers the withdrawal rate over time, Thomas says.

4. Postpone retiring from the pension fund

Dave Crawford of Planning Retirement says people retiring from employers may now leave their money in their retirement funds and retire from the fund later.

“Any delay in investing in a pension will enable their retirement capital to grow.”

5. Generate an income

Crawford says few people consider the value of their work experience, education, training and skills. “If human capital can produce income in early retirement the need to draw a pension can be postponed.”

6. Explore various annuity options

Investing in an LA means individuals shoulder the risks of inflation, investment and living too long. All are underrated or ignored with tragic consequences, Crawford says.

“There is great deal of ignorance about guaranteed pensions. But of all their qualities, the guarantee that pensions are paid for as long as the pensioner and/or spouse live seems often ignored.”