Are you overestimating your retirement funds?

● Many South Africans are not doing enough planning when it comes to retirement and think that their savings will generate a pension way beyond what their money can sustain.

This is evident from new research published by an annuity provider and data produced by a local investment manager.

Annuity provider Just SA recently published its “2019 Retirement Insights” after interviewing more than 500 South Africans between the ages of 50 and 85.

The survey found that many people believe that they have enough money to sustain themselves and their spouse or partner, but their retirement savings levels are in fact too low to meet their income expectations.

Only 53% of those surveyed by Just SA had actually worked out how much they need and about half are not confident that their money will last through retirement. About 80% of those who are within five years of retirement have saved less than R2m, but more than 50% of them expect to draw a monthly income of more than R8,000.

The rough rule for working out what you can safely draw as pension from your investments is: for every million you save, you can sustain an income of R4,000 a month — or 5% of your savings a year.

This is an income that will last 30 years, which is the period for which healthy retiree should plan.

Among those who were expecting to retire with R750,000 or less, more than half expected they would earn a pension equal to more than 16.5% of their income and some thought they could draw as much as half of the money each year.

Even among people with between R1m and R5m saved for retirement, more than half expect a pension equal to more than 8.6% of their savings each year as a pension.

Marriott, the investment manager that specialises in investing for an income in retirement, recently tested how much retirees could have safely drawn from their savings without running out of capital over each 30year period dating back to 1900.

Marriott assumed that retirees would have invested in a typical balanced or multiasset unit trust fund in which 60% of the fund was invested in shares, 30% in bonds and 10% in cash and they earned what the market delivered for each asset class.

Lourens Coetzee, an investment professional at Marriott, says the manager tested what would have happened when retirees drew different savings as a pension.

It found that in some 30-year periods, retirees could have started drawing as much as 13% of their capital and they would not have run out of money throughout that period.

But in other 30-year periods, retirees who drew less than 5% a year initially, increasing by inflation each year, still ran out of capital before the end of the period.

Coetzee says a lot depended on the returns the retirees enjoyed in the first 10 years of their retirement.

The difficulty for you, however, is that you do not know what returns you will earn, he says.

This history shows that drawing out a pension that starts at just 4% or less of your savings is the safest way to ensure you do not run out of capital, he says.

In only 6% of the 88 different 30-year periods tested did retirees drawing 4% of their savings run out of capital before the 30 years were up, he says.

Investment-linked living annuities are used by most South Africans to draw a pension from investments. Providers of these products report that on average South Africans are drawing more than 6% of their capital, but in almost half of the periods Marriott tested (47%), retirees drawing a pension at this rate would have run out of money before 30 years.

The concern for those retiring today is that market returns are expected to be below average for the next decade due to demanding valuations (prices relative to earnings), combined with lower economic growth expectations, says Coetzee.

Just SA CEO Deane Moore calculated that given the poor investment returns of the past five years, South Africans who are currently retiring are likely to find their assets are worth about 15% less than they would have been under normal investment conditions.

Just SA’s survey found that two out of five South Africans cannot afford to lose any of their savings before it seriously affects their retirement plans, yet three in four believe they can manage their own retirement investments in a living annuity without any financial advice.

Moore suggests retirees use guaranteed or life annuities, which guarantee a pension for life, to cover their basic needs as these annuities protect you from the risk of outliving your capital and often allow you to increase the rate at which you withdraw.

Just SA’s survey found that half of those it interviewed said they would rely on their children if they run out of money in retirement, but they paradoxically believe they should leave a legacy for their children and attempting to do that often increases the risk that their children will have to support them rather than inherit from them.

Coetzee says you must consider your situation carefully if you are considering using your capital — and not just the growth on it — to supplement your income.

Marriott strongly urges investors to preserve their retirement savings until they reach a stage in their retirement years when it may become safer to draw down on capital, Coetzee says.

While investors may find it challenging to restrict their annuity income to the income produced in the current low-yielding environment, it is preferable to finding that one’s capital has been partially or even completely eroded, he says.