Do you have enough to retire on?

An era of lower market returns should encourage retirement savers to reassess their pension strategy. Experts are warning that the high investment returns experienced in the last decade will not be repeated anytime soon. That offers a clear warning to anyone contributing to retirement savings: beware of being too conservative.

Equity markets have historically delivered returns of around 7% above inflation. But that’s not the case anymore. In the “new normal” investment environment, there are fewer opportunities. As a result a number of analysts are saying if we see double digit growth in the market, we can be very happy.

That should serve as a reminder to savers to make sure they’re making sufficient returns, without necessarily taking on more risk. People generally invest too conservatively, not allowing their funds to grow enough, pre- and post retirement. There is an opportunity cost to investing too conservatively, so find the right balance between taking on additional equity exposure and taking on too much volatility.

As it is, South Africans are poor performers when it comes to saving for retirement. Only one in six South Africans will be in a position to retire comfortably. The problem is that people want to spend their money now and are not willing to wait for delayed gratification and aren’t putting enough away for later years.

Are you saving enough?
So how do you know if you are saving enough? Firstly, decide when you want to retire. Then make a realistic, if not slightly conservative, projection of the likely rate of return. Through this you can determine if you have a retirement gap and you can determine how much you’ll need to put away in addition to current savings in order to cover that gap. Regular checks should help ascertain whether you are still on track to retire at the desired age. If you can’t afford to retire then don’t.

One cannot expect investment returns post retirement to make up for poor provision. As a general rule of thumb people should have around 20 times their normal annual salary saved on retirement.

How much income to draw
When you retire beware of withdrawing too much income, which would eat into your available retirement capital. The Association of Savings and Investments South Africa (ASISA) recently adopted a code on living annuities, which provides guidelines as to how much a retiree should withdraw.

According to these standards, a 55-year-old man’s income levels should not be more than 5.4%, and a woman’s no more than 4.7%. At age 70, income levels can rise to 8.5% for a man and 7.2% for a woman.

This, however, is not happening in reality. Most retirees I come across are withdrawing around 8% at the start of their retirement. As a result, they often run out of money in less than 10 years into retirement.

It is still of utmost importance to keep income levels as low as possible in order to preserve capital for as long as possible.

Protecting against inflation
Inflation is another risk to retirement savings. With consumer inflation currently running at nearly 5%, capital increases should be keeping pace with this in order for you to retain purchasing power. But if inflation exceeds your investment return, you’re going to delve into your retirement capital as opposed to your investment growth. This will result in a situation where you will be forced to reduce your standard of living.

How do you protect yourself against inflation? Use absolute return funds as part of your portfolio.

These funds use inflation as a benchmark, and therefore invest in order to beat inflation by a certain percentage (determined by the type of absolute return fund). When markets fall, these funds protect capital, and when there’s a bull run they’ll try to participate in the run. The net effect is that you’re ensured that your return will always beat inflation.

Those funds should form part of a diversified portfolio, invested across a number of funds, asset classes and fund managers in order to reduce volatility. Don’t switch between asset classes too often.

Don’t try to be too active or try to time the markets. There will be times when you lose money, especially if you’re invested over a long period. But don’t panic as this is only natural.

Beware of your emotions
Emotional investing is a fundamental mistake made by savers. Investors make emotional investment decisions and thereby destroy most of the potential performance. Rather determine your investment term, define your strategy and then stick to that strategy for the complete investment term. That strategy should only be amended if, for example, circumstances were to change, or an under-performing manager is replaced.

If you are unprepared for retirement — or you have failed to fully understand the importance of providing for retirement — remember that no one else will care about your financial position. You are the only one who will be responsible for your financial future.

Henrico Morkel is chief operating officer at Fin-Q Financial Services, a division of Sanlam Investments