Rising costs of living and high levels of unemployment in an unpredictable economic landscape have turned traditional financial aspirations on their head as people desperately scramble to overcome short-term challenges at the cost of long-term investments.
Head of Behavioural Finance at Momentum Investments, Paul Nixon, says it is these turbulent times that have unfortunately shifted behaviour in retirement investments. “There was certainly no shortage of uncertainty over the past two years and sadly many investors with living annuity products, suffered losses.”
According to Momentum Investments’ latest Sci-Fi report, 2021 saw increased engagement between investors and their portfolios and was driven by panic – causing many investors to lose money by switching their investments midway.
In a recent update of this study, Momentum investigated the investor behaviour of those in the Momentum Investments Retirement Income Option (RIO) or living annuity product. It was found that retirement investors performed more than double the volume of switches in 2021, amounting to over 50,000 switches. While this was down by 6% from the record levels experienced in 2020, Nixon says it remains alarmingly high.
“We have to acknowledge that market events that have cascaded across the globe since the onset of the pandemic have caused havoc with investors’ retirement savings. Investors panicked and opted to try and stem losses by reacting in the moment,” says Nixon.
Putting it into perspective, he says these 50,000 plus switches in the retirement investment landscape resulted in nearly half a billion rands in value destroyed in 2020 and 2021 as retirees battled to overcome the market turbulence trap that may have lasting effects on their standard of living.
With the markets, and unpredictable economic bumps in the road continuing to occur, Nixon says this poses a major concern for the future economic outlook of South Africa as a whole. “Right now, we not only have lost value on retirement fund returns, but there is also a two-pot system in the works which will allow many people to access their investments before retirement.”
Nixon fears market turbulence coupled with the rising cost of living will make it difficult for investors to balance their short-term income needs with longer-term growth needs to protect against the corrosive effects of inflation.
“Investors are furiously engaging with financial markets, so the growth or decline of retirement savings is going to have a direct impact on their standard of living when the time to retire comes – which is going to be significantly more costly if things continue the way they are.”
With less value in our retirement funds due to switching, and more investors potentially dipping into their investments before retirement, Nixon warns that it will be the country that shoulders the burden of those who can no longer afford to retire.