Mark Philips, Co-Deputy Chief Investment Officer & Strategist and Paul Wilson, Chief Investment Officer at Sanlam Investments Multi-Manager
With just 10% of retirees able to afford to live with dignity, the nation needs drastic action to solve its income security crisis. Now’s the moment to think creatively and take the ‘road less travelled’. A road that doesn’t just offer a more robust retirement plan; it could be a cornerstone in a sustainable economic strategy to help South Africa reach Sustainable Development Goal 1: ending poverty.
South Africa’s situation
South Africa’s retirement situation is nothing short of a crisis. Addressing income security for South Africans should be a national imperative and ongoing focus for the financial services sector. In a nation of extreme inequality, it’s unfair to blame people for failing to save enough; rather, the industry needs to challenge the status quo and find new ways to ‘do better’ with the money that people do have. That means finding creative solutions that are financially effective and socially responsible. As part of this, intermediaries have a pivotal role to play in articulating and solving South Africans’ needs.
Choosing the road less travelled for clients
People’s inability to retire comfortably places a massive burden on South African households and the state. To protect individual’s – and our country’s – financial futures, we need to address sequence risk to ensure a smoother journey for retirement clients. This means advocating the road less travelled, rather than the traditional ‘safe route’ of conservative, low-yield savings accounts and bonds.
This ‘road less travelled’ features a diversified portfolio, with alternative investments, hedge funds and smoothing techniques. It seeks to generate higher returns in good times, protect clients from devastating lows, and mitigate sequence risk (the risk of bad market timing just as one retires).
Its primary aim is to offer a level of financial insulation that protects capital, while also facilitating real returns. We know the first five years post-retirement are critical. People often go through a delicate de-risking period, where the risk is that they lose out on returns in the strong bull market, and experience losses in a big bear market. Using different types of investments to create a portfolio with ‘large exposure to growth assets’, without that drawdown risk, sets clients up to be in good shape pre- and post-retirement, whatever market swings may come.
We have seen the success of this “road”, with the Glacier Invest Real Income Solutions launched to the retail market via Glacier Invest, our Discretionary Fund Manager. These solutions were launched about three months after the start of the pandemic. They’ve done well in protecting capital and generating a market competitive performance relative to their peers.
Other considerations for client income security and retirement planning
Consider the client: People’s circumstances dictate the choices they have available to them. Intermediaries play an enormous role in giving people their best options, with their holistic financial health and goals considered.
Life staging and investment horizon: It’s also about considering which life phase a client is in, to assess how much risk can be tolerated, and the optimal timing for ‘smoothing’. It’s about pinpointing a person’s holistic needs in every period of their life.
The big picture: Key deductive uncertainties: South Africa’s economic trajectory is a major uncertainty affected by numerous variables. As such, planning for retirement involves not just individual uncertainties, but responding to macroeconomic ones as well. For example, in a scenario where South Africa sees robust economic growth and stability, investment opportunities should, by definition, improve, allowing for more diversification and high return investment options, leading to better outcomes. In another scenario where we see further economic decline, instability will continue to reduce the value of retirement savings; in this situation, stable, conservative investment options like bonds may be best. The nation’s economic trajectory has a deep impact on another major deductive uncertainty – longevity and healthcare. The risk of outliving one’s savings, coupled with the risk of a strained public healthcare system and costly private care, should be of significant concern. Again, it’s crucial to invest in growth to ensure sufficient funds for a longer retirement.
These uncertainties add further layers of complexity to retirement planning, requiring holistic, adaptive and forward-thinking strategies.
Retirement reimagined: Lastly, we need to reframe retirement to be a more fluid, flexible and personal journey. People may continue working, embark on second careers, get involved in meaningful community work and more. Flexi-retirement may make a big difference in fostering greater income security.
The future of retirement
The future of retirement in South Africa does not have to be bleak. By being willing to explore diversified investment options and aligning these with broader sustainability goals and creative strategies, we can make strides toward securing a future where everyone can retire with dignity. It’s not just a financial issue; it’s a moral imperative. It’s time to stop treating retirement planning as a personal challenge to be solved and start seeing it as a societal issue that we can collectively address.
ENDS
