Time for caution
Investors need to take heed of the changing climate in the retirement investment sector
nvestors seeking both immediate income and long-term capital growth, specifically those in retirement, need to pay special heed as the investment environment grows cloudier.
Coronation head of personal investments Pieter Koekemoer says it is critical that retirees have a well-constructed portfolio with enough exposure to risk assets to achieve reasonable real growth over time, but not so much that a near-term market correction will impair their capital base.
“Between 2008 and 2011, we warned that retirement funding portfolios were too conservative and needed more exposure to growth assets. In recent years, however, investors have taken on much more risk,” Koekemoer says.
He is concerned about the strong trend among post-retirement investors to invest in multi-asset funds with large equity allocations (the typical regulation 28-compliant balanced fund). These high-equity funds are typically not specifically managed with post-retirement clients in mind, but rather for the build-up to retirement.
“While traditional balanced funds have generated excess returns over the past six years in a relatively benign environment, we fear that some retired clients may now be too complacent about the actual risks in these funds. A market slump at the wrong time can have a negative, permanent impact on the retired investor’s standard of living,” says Koekemoer.
He says for investors who are retiring — or have retired recently — a more appropriate consideration is to invest in an income and growth fund (lower or moderate equity multi-asset fund) that explicitly aims to reduce downside risk (protect capital) in the shorter term.
He adds that if a client’s real retirement
Icapital remains intact after the first 10 years of retirement, it is likely that their real living standards will be sustained for the rest of their life. Selecting a prudent initial drawdown rate, namely the percentage of income retirees draw from their retirement capital annually, therefore becomes crucial.
“Market valuations at the time of retirement should play a key role in deciding on such a drawdown rate,” Koekemoer says.
He argues that another good reference point is the age-appropriate annuity rate quoted by life companies on an escalating guaranteed annuity.
For relatively healthy retirees in their early 60s, a prudent initial drawdown rate in the current environment is believed to be between 4% and 5%, compared with the average drawdown rate of 6,59% in SA living annuities in 2014.