Tania Pringle, Wealth Manager, Cartesian Wealth and Advisory
Retirement – it’s the golden chapter of life we all aspire to. But how do we ensure that our pension funds not only sustain us but also thrive?
When transitioning from a traditional pension fund to a living annuity, the stakes are high. It’s not just about paperwork; it’s about securing your financial well-being for decades to come.
Advances in medicine, lifestyle and societal changes have influenced life expectancy over time, which has created a challenging environment for pensioners . In addition, the pension funds have underperformed in local markets, as the SA economic growth has been stifled and pension funds are regulated to invest a minimum of 55% in local assets. The result is that pension funds have missed on global investment opportunities which bring real growth.
Initial income draws of less than 5% of capital can support an inflation adjusted income over 30 years. This, however, seldom meets the lifestyle needs of the pensioner and requires him / her to remain in the workforce, which is a short – /medium term solution.
Retirees can no longer afford to de-risk when planning for post-retirement and the following principles may be considered to plan for a dignified retirement lifestyle over the long-term:
- Higher income requires higher equity exposure – more than 4% initial income draw needs more than 60% equities.
- Offshore equities exposure between 25% and 55% of total assets for all types of living annuities.
- Partnering with the right financial manager who can reduce volatility and add alpha (outperformance) by actively managing the strategy.
The Risk of not taking Risk :
Below is an illustration of the real effect of asset allocation on a living annuity for pensioners who retired in 2000. Where high equity allocations were made, the initial capital held its value over 23 years, based on a 5% living annuity income drawdown.
Source : Ninety One. Please note that the funds in the illustration are not recommendations, but rather used as examples to illustrate a principle.
Furthermore, selecting funds with managed volatility and outperformance of its peer funds, will significantly affect the capital value over time. As illustrated below, the difference between the annualized performance of the funds is not remarkable.
- Green Line : Top performing fund : 12.60% p.a.
- White Line : Middle performing fund : 11.52% (1.08% p.a. less than top fund)
- Yellow Line : Bottom performing fund : 11.06% (0.46% less than middle fund and 1.52% less than top fund)
Importantly, the cumulative affect over time (2000 – 2023) shows the value of compound interest over time and how fund selection can contribute towards capital preservation.
Source : Ninety One. Please note that the funds in the illustration are not recommendations, but rather used as examples to illustrate a principle.
Striking Right Balance
The answer lies in partnering with a specialist who can assist with crafting a successful and flexible long term strategy through making informed choices.
Taking unnecessary risks can jeopardise retirement dreams. The right financial advisor can help navigate these treacherous waters and guide the retiree away from impulsive decisions and steer them toward sustainable growth.
On the flip side, being overly cautious has its pitfalls. If you shy away from risk entirely, your capital might stagnate. Inflation nibbles away, and suddenly that dream vacation seems elusive. Your financial advisor strikes the right balance—ensuring growth without undue exposure.
A qualified financial advisor isn’t just a title, or a number cruncher; they’re the architects of their clients’ retirement legacy and should empower pensioners to embrace smart investing, seize opportunities, and savor the golden years.
Retirement isn’t a destination; it’s a journey. And with the right financial advisor by your side, it’s a journey worth celebrating.
ENDS
