We are liv­ing for longer — and our re­tire­ment in­vest­ment strate­gies need to fac­tor this in

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Speak­ing to a fund man­ager or fi­nan­cial ad­viser about re­tire­ment sav­ings in­vari­ably leaves one feel­ing in­ad­e­quate. And there is no short­age of statis­tics to back up the build-up of un­ease.

The Na­tional Trea­sury, for in­stance, says only 6% of South Africans will be able to re­tire com­fort­ably. And ac­cord­ing to the San­lam Bench­mark Sur­vey of re­tire­ment funds, just 19% of mem­bers in stand­alone funds and 14% in um­brella funds can main­tain their stan­dard of liv­ing on re­tire­ment.

One last num­ber that shouldn’t come as a shock, but that re­ally drives home the point, is that liv­ing to 100 or more is go­ing to be a re­al­ity for a grow­ing num­ber of peo­ple.

“I ac­tu­ally think [the sit­u­a­tion] is much worse than what is gen­er­ally per­ceived,” says PSG Wealth’s chief in­vest­ment of­fi­cer, Adri­aan Pask. “We have a mas­sive pen­sion gap in terms of what is re­quired to re­tire com­fort­ably and what in­vestors are sav­ing.

“Our sav­ings rate is way be­low what it ought to be, which is not a prob­lem that is unique to SA. Many de­vel­oped mar­kets are strug­gling with the same prob­lem. Where we stand at the mo­ment, there is a $70 tril­lion global deficit that is set to in­crease to $400 tril­lion by 2050.

“To put that in con­text, the global fi­nan­cial cri­sis is es­ti­mated to have lost eq­uity in­vestors be­tween $2.8 tril­lion and $6.6 tril­lion, so it is a far more sig­nif­i­cant cri­sis we have on our hands to get peo­ple to save much sooner and more of­ten.”

Then fac­tor in our longer life span, which re­search shows has in­creased by three years ev­ery 10 years since the 1940s, says Pask.

“Maybe 20 years ago, your post-re­tire­ment in­vest­ment hori­zon would have been 20 years,” he adds. “Now you’re prob­a­bly look­ing at 30 or 40 years, which is more or less the same as your work­ing life.”

Nat­u­rally, th­ese per­muta- tions and pre­dic­tions oc­cupy the minds of ac­tu­ar­ies and pen­sion fund man­agers, who have to try plan for a fu­ture 40 years hence. And those 40 years might be­come 50 or 60 as the re­tire­ment age is pushed back in re­sponse to peo­ple liv­ing longer.

That is cer­tainly some­thing John An­der­son, group head of client so­lu­tions at Alexan­der Forbes, has taken into ac­count. To­gether with Syg­nia As­set Man­age­ment’s Steven Empe­do­cles, he pub­lished a pa­per in 2016 on the “re­tire­ment in­come fron­tier” as a pos­si­ble so­lu­tion to the an­nu­ity puz­zle.

An­der­son ex­plains that the the­o­ret­i­cal an­swer to en­sur­ing in­come in re­tire­ment is to take out an an­nu­ity prod­uct with longevity pro­tec­tion — like an in­sur­ance prod­uct against liv­ing longer.

“The prob­lem that we’re see­ing is that more peo­ple take a liv­ing an­nu­ity with no longevity pro­tec­tion and they typ­i­cally in­vest it in a con­ser­va­tive port­fo­lio,” he says.

This strat­egy is bound to find re­tirees fac­ing a sig­nif­i­cant short­fall, if this is the ba­sis of their re­tire­ment strat­egy.

An­der­son says he and Empe­do­cles there­fore con­sid­ered an al­ter­na­tive ap­proach at re­tire­ment that is more suited to a pen­sioner’s goals — whether th­ese be earn­ing an in­come for longer, or be­ing able to leave a mean­ing­ful legacy.

“You can then cre­ate what is called the re­tire­ment in­come fron­tier, which gives you the op­ti­mal strat­egy for your goals.

“What we re­alised is that peo­ple, from day one, are fo­cused on in­vest­ment re­turns, where for re­tire­ment specif­i­cally they should purely be fo­cus­ing on in­come.”

As a re­sult of this re­search and changes in the in­dus­try, he says, hy­brid an­nu­ity prod­ucts have started emerg­ing. This has al­ready helped pen­sion­ers make bet­ter-in­formed de­ci­sions that could help them se­cure the in­come they need for the pe­riod they need.

An­der­son points out that while the pa­per fo­cused on the ef­fect on de­ci­sions at re­tire­ment, the same prin­ci­ples ap­ply in one’s work­ing years.

This has be­come eas­ier with the in­tro­duc­tion of prod­ucts that help savers adapt their strat­egy to their life stage. Port­fo­lios may be in­vested more ag­gres­sively in growth as­sets ear­lier in an in­vestor’s ca­reer, mov­ing pro­gres­sively into more con­ser­va­tive as­sets as he or she nears re­tire­ment.

With re­tirees fac­ing in­creas­ing life spans, this ap­proach might need to be adapted, says PSG Wealth’s Pask.

He sug­gests that be­cause the time hori­zon is now so much longer, re­tirees could use that ex­tra time to re­main in­vested for longer in high­er­growth as­sets — within rea­son, of course.

“You ac­tu­ally have so much time left, you can’t af­ford to be in­vested too con­ser­va­tively. So there is def­i­nitely a space for eq­uity in­vest­ment post re­tire­ment, es­pe­cially con­sid­er­ing you may still have an­other 30or 40-year time hori­zon left.” ●

“The prob­lem that we’re see­ing is that more peo­ple take a liv­ing an­nu­ity with no longevity pro­tec­tion and they typ­i­cally in­vest it in a con­ser­va­tive port­fo­lio

Adri­aan Pask … A sav­ings cri­sis

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