Your concerns about retirement savings

In the question-and-answer session that concluded the Ready Set Retire conference in each region, a panel of experts fielded a range of questions from delegates, including the following: ◆ When you get close to retirement, should you move your funds into a more conservative portfolio or remain in an aggressive portfolio?

John Anderson, head of research and product development at Alexander Forbes: It depends, among other things, on how much you’ve saved, and what type of pension you buy. If you are looking at a guaranteed annuity, you need an investment strategy which, about five years before retirement, builds up something that looks like and behaves like that particular option. If you choose a living annuity with a drawdown rate that keeps your capital intact, it is possible to have a more aggressive investment strategy.

The minute you actually start drawing a pension from the capital is when you need to be very wary of markets going up and down, particularly in the first year. Research has shown that if the market crashes in the first year and your drawdown rate is quite high, invariably you don’t recover from that situation.

So you don’t want to be too aggressive, but you also don’t want to be too conservative, because you need good, real returns over the long term to sustain you, especially because people are living longer. So it’s a balancing act. Retirement funds put defaults in place to reduce your risk as you approach retirement, but you really need to look at your own circumstances. ◆ Would you recommend that any excess from the drawdown from a living annuity be invested in a unit trust? In this way, you have access to it quickly and it can grow better than inflation.

Bruce Cameron, former editor of Personal Finance: It’s a good idea to reinvest money that you are not spending. However, a better solution would be to work out exactly what you need and not have an excess or a shortfall.

Jeff Spiller, financial adviser at Alexander Forbes: You must realise that every cent from a living annuity is taxable, so if you were going to do that – earmarking part of your drawdown for discretionary savings – it’s quite an expensive way to do it. You could lose, say, 30 percent to tax, and then, if you reinvest that money in, say, a money market fund, you could pay tax on it again. ◆ If I retire with only R700 000 in a provident fund, would a financial adviser even be interested in assisting someone like me?

Ken Russel, financial adviser at Alexander Forbes: I do think that financial advisers have to talk to people with smaller amounts of money. We have a job, a vocation, and that includes helping people in your position. It’s quite possible that an adviser will not make any money at all in a case such as yours, but I don’t see a problem with you getting advice from a company such as Alexander Forbes. ◆ What is the best solution for investing a spare R100 000 a year – paying it into a home mortgage, paying it into a retirement annuity (RA), or is there a better option?

Bruce Cameron: Again, it depends on your circumstances. In a typical situation, I would pay off the bond first. But the essential part of that decision would be that when the bond is paid off, all the money you were using to pay off the bond goes into an RA.