How to ensure you have built an adequate nest egg

Nick Brummer, director at Investonline. (Photo: Suzette Vorster)

Nick Brummer, director at Investonline. (Photo: Suzette Vorster)

While investors are constantly reminded to take a long-term perspective when it comes to saving for retirement, the years leading up to retirement should become less about wealth creation and more about wealth protection — whether it be protection from volatility in the market, inflation risk, or just a bout of bad luck.

This is according to Nick Brummer, director at Investonline, who says that the effective management of investments during the “danger zone” years leading up to retirement is crucial to ensuring a financially secure retirement.

“Saving for retirement is about addressing the right risks at the right time. Younger investors, whose most pertinent risk will likely be related to whether they have enough scope for capital appreciation, are able to take on additional risk and should therefore be investing a large portion of their wealth into growth assets. This propensity for risk, however, should decrease in the years approaching retirement.

“This is because when you are younger, you are usually taking a very long-term investment view, particularly with regards to retirement, and should not be overly concerned about short-term volatility, as the majority of this is likely just noise. As you get older, however, the risk of wealth erosion increases and, as a result, your investment strategy should gradually shift from being ‘return-chasing’ towards being increasingly ‘wealth-protecting’ in nature,” he explains.

Another thing that Brummer says investors need to consider when nearing retirement is the management of their retirement fund proceeds. “As a member of a South African retirement annuity or pension fund, you are not allowed to take more than one-third of your proceeds as a cash lump sum (unless the fund value is less than R247 500), and must buy an annuity with the balance.

“While the option of a cash lump sum will confer certain tax advantages, in that the first R500 000 is tax-free, this will reduce the amount of retirement fund proceeds you have available to purchase an annuity — which can either be a guaranteed/life annuity or a living annuity.”

Brummer explains the basic differences between these two types of annuities.

“In the case of a guaranteed (single-life) annuity, your insurer will pay a specified monthly pension for the rest of your life.

“The major drawback here is that your capital dies with you, and no money is passed onto your heirs. A living annuity, on the other hand, transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and the capital in your living annuity will pass to your nominated beneficiaries if you die.”

With regards to effectively managing your living annuity, Brummer says that using an appropriate retirement planning tool or consulting with a qualified financial advisor will ensure that an investor gets the solution most appropriate for them.

“Your living annuity can be invested into any top-performing unit trusts available on the Investonline platform, and we are able to assist you with selecting the best suite of unit trusts to ensure that they match your specific risk profile and individual needs.”

Upon reaching retirement, Brummer says that an investor’s risk profile will shift once more, with longevity risk taking centre stage.

“Protecting yourself against longevity risk — the risk of outliving your nest egg — will become the biggest risk you face in your retirement years. It is therefore essential that investors rebalance their portfolio annually to ensure their investment stays on track and possibly even consider delaying retirement by a few years.”

Brummer emphasises that one of the most important things that an investor can do to protect their nest egg as they near retirement is to ensure that they know what options are available to them.

Awards showcase excellence across the spectrum

The IRFA’s Best Practices Industry Awards (BPIA) and recognition programme has grown from strength to strength since its initial inception as a communication challenge some 29 years ago.

According to programme moderator and judge Stephanie Griffiths, the programme was extensively reviewed three years ago by a panel of industry experts and benchmarked both locally and internationally against similar programmes of achievement.

“The result of this exercise was the addition of a number of awards categories to the BPIA awards to include fund governance, stakeholder engagement, investment practice, trustee development and transformation.

“The awards also make provision for special mention of innovative and sustainable practices,” says Griffiths.

The programme attracts entrants from retirement funds and service providers across the spectrum. Griffiths notes that the standard of entries has improved exponentially over the years.

“One of the core objectives of the programme has always been to identify best practices, which set the standard for the industry and by bringing these into the public domain IRFA strongly believes they are adding to learning and the body of knowledge,” says Wayne Hiller van Rensburg, president of the industry body.

“Today’s retirement space is a rapidly transforming one, with fluid work environments, exciting new membership bases and many transformational imperatives to keep abreast of the needs of all stakeholders,” he adds.

“This has been aptly reflected in the entries, solutions and content presented by entrants in this year’s BPIA programme. Solutions in addressing a mobile membership base, not only engaging stakeholders but partnering for member wellbeing, innovative development programmes, and highly effective stakeholder engagement, show that the African retirement industry ranks amongst the best in the world for innovative and dynamic transformation.”

Hiller van Rensburg says that for the first time this year the IRFA attracted programme sponsors committed to the sustainable development of the industry.

“We would like to thank our programme sponsor the SABC Pension Fund and our category sponsor Legae Investments for partnering with us in this initiative.”

Supporting best practices in the retirement industry

The IRFA Best Practice Awards Programme, which started off as a communication challenge, is now 30 years old and has grown to reflect industry best practices on an international scale. With that in mind the SABC Pension Fund stepped up in support of the programme by providing sponsorship for the awards presentation that was held at IRFA’s annual conference in Durban early in September 2017.

“As the SABC Pension Fund, we believe that the IRFA’s Best Practice Awards programme promotes sound and sustainable practices in the industry in relation to governance, stakeholder engagement, investment, financial reporting, transformation and trustee development,” says Anthony Williams, chief executive of the SABC Pension Fund.

“All funds are encouraged to enter the programme and share their practices with the industry at large, which is of utmost importance in terms of knowledge transfer,” he adds.

The awards are hotly contested and sought, with a judging panel that features subject matter experts and industry thought leaders. Entries are attracted from across the spectrum, from smaller funds to superfunds. Entries also reflect contributions from retirement funds involved in member communication and education, in an environment in which members work in many different locations and are rarely together in one place.

The status of the awards is reinforced by the fact that many of the awards winners have gone on to enter and win major international awards. One such winner is the SABC Pension Fund.

“We have been extremely fortunate that the SABC has been awarded five prestigious international awards this year, and therefore it is imperative that we support the 2017 IRFA Best Practices Awards in the interests of raising the standard in the industry for the benefit of both members of retirement funds and society at large,” says Williams.