Stats SA recently revealed a shocking 3.2% drop in South Africa’s Gross Domestic Product (GDP). This is reportedly the worst decrease in GDP since the same period in 2009, in the wake of the global financial crisis.
Regard Budler, Head of Strategic Initiatives at Momentum Corporate said while economists assess the macro impacts, many are left wondering what this all means for their retirement nest eggs.
A worrying trend
“A drop of 3.2% GDP indicates a worrying decrease in our economic growth – our economy is essentially shrinking. It also means that companies are not growing as much as what we had hoped for and this has an impact for many retirement fund members,” he said.
“Our retirement fund savings are often invested into many listed companies which are unlikely to do as well as what we would see when the economy is growing well. This would certainly have a negative impact on retirement investments, especially if the low economic growth becomes a long-term trend. The average retirement fund member will therefore have to invest more to reach their goal of a comfortable retirement,” cautioned Budler.
Budler said, however, that there is no need to panic and explains that if a client’s retirement fund follows an outcomes-based investment strategy, the fund would make provisions for short-term fluctuations in investment values. Retirement fund trustees, asset managers and asset consultants would ensure that investments are well diversified to achieve the long-term goals to soften the blow of these short-term fluctuations.
“Fortunately, we have not seen any material impact in the markets following the announcement. This is partly due to the markets having expected some contraction in the economy for the period. What would be concerning is that if we have another quarter with contracting growth, we might see retirement investment values decreasing if the markets and key asset classes do the same,” he said.
Level of retirement readiness
“Over the last two years the retirement savings of most South Africans have grown at rates less than expected. Therefore, the level of retirement readiness of most South Africans has deteriorated over the last 24 to 36 months and as such it is time to help people find practical ways to save more – this might start by helping clients budget better,” said Budler.
“A critical role of financial advisers is to remind retirement fund members to remain calm, despite market volatility and poor short-term returns, to keep them from making rash and emotional investment decisions. It is always a good time to have a conversation with a client around their future needs and whether they are on track to ensure a comfortable retirement. Most South Africans are simply not contributing enough towards their retirement savings,” he continued.
A multi-channel approach
Budler also highlighted that understanding the cost of solutions is an important part of the purchasing decision. It also tends to be the easiest one as everyone wants to save money.
“However, like good financial advice, it is about the value of the service or product a client receives that will determine if they ultimately will achieve their goals or not. An inappropriate solution at a low cost could be a lot more damaging than a more expensive solution that meets a client’s true need.”
“Any initiative, such as Retirement Benefit Counselling, which makes it easier for members to understand their journey to retirement success can only be beneficial. We believe that the industry needs to go beyond the legislative requirements to meaningfully address the lack of financial literacy in South Africa. Benefit counselling needs to take the form of a multi-channel approach that caters for a changing workforce. The objective should be to effectively partner with financial advisers, their clients and their clients’ employees on their journey to financial success. Although most funds have Retirement Benefit Counselling in place, there is no substitute for holistic financial advice,” concluded Budler.
Financial planners have a key role to play in the future of the country and creating a saving culture but is it easier said than done? What more can financial planners do to make the process of promoting a savings culture a reality? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts firstname.lastname@example.org.
Article published courtesy of FANews