The typical life-stage-cycle approach to investments is that in your 20s you have a maximum exposure to equities, which reduces over time as you get closer to retirement. By the time you retire at 60, your pension should have no equities and be fully invested in cash and bonds with no risk.
There are a few problems with this simplistic view. For example, it does not take into account the option of transferring your money to a living annuity, which means you do not have to cash in your equity investments in a bear market. Money will investigate living annuities next month.
But the most important point is that we are living longer. If our life expectancy were 70, then maybe we could trade in growth for safety. Today we are more likely to live until we are 90. This means that when we retire, our investment time frame is 30 years. This changes completely the way we should look at retirement funding.
Nic Andrew of Nedgroup Investments uses as an example two people retiring at 55 years old with exactly the same lump sum. If one invests in cash, the money would run out at about age 77. The second person, who invests in a balanced fund that returns inflation plus 4%, will only run out of funding at age 85. By putting the investment in a moderate return fund with some protection against market movements, a retiree can extend retirement benefits by seven years.
Old Mutual’s Dave Hudson recommends looking at our retirement savings as having different end points with different investment horizons. For example, on retirement you may have several projects you want to carry out, such as a dream trip or buying a new car. You need to have this money readily available in cash a year or two before you retire.
When it comes to income generation for the first five years of your retirement period, you do not want to take any risk on this money and should have it in very low-risk investments such as cash. Your income needs from 65 to 70 can be in higher income-generating investments such as bonds, property and preference shares.
The money you will need to fund your 70ss should have some equity exposure — but on the lower side of the risk spectrum, such as smooth bonus funds or absolute return funds.
The money for your 80s and 90s effectively has a 20-year time horizon from retirement, so it can be invested in a well-diversified equity portfolio with offshore exposure. The fund doesn’t have to shoot the lights out, but it needs to keep up with inflation and offer real growth.
Your investments would need to be adjusted each year so that you are continuously rebalancing the portfolio and adjusting for the time horizons. This system of varying time horizons can just as easily be used when you are still working.
At the age of 35, you will want to have cash for the things you want to do in the near future, such as an overseas trip, a low-risk investment for your children’s high-school fees in seven years’ time, and diversified equities for your retirement fund in 25 years’ time.
Know what disability cover you are buying
Becoming disabled can be a fate worse than death, especially if it impacts on your ability to earn an income. But people are often worried that, should they ever need the cover, they won’t be paid out.
Peter Temple, convener of the Disability Benefits Committee of the Life Offices’ Association (LOA) and Managing Director of Gen Re Africa, says that, for consumers, one of the biggest problems with disability cover is the lack of clarity about whether a specific policy will pay out. For this reason, life companies are moving away from the traditional subjective ways of classifying disability in terms of whether you can perform your own or a similar type of occupation, to objective ways which stipulate that you will qualify for a benefit if, say, you lose an arm. However, when taking out disability cover, make sure you have the right cover. If you buy “own” occupational disability cover, you are insured if you are no longer able to do your job due to disability. But “own or similar” occupational disability cover will not pay a claim if you are still able to perform a reasonable alternative job. Confusion about these options often causes trauma at the claims stage when policyholders come to realise that they are not entitled to a benefit payment because they are still able to perform alternative jobs.
Temple also recommends that you opt for a policy that offers both a lump-sum payment and income-replacement benefits. The lump sum will assist with costly adjustments to your environment to help you live with your disability, while the income protection guarantees you a regular monthly income at your chosen level until retirement.