Why a conservative retirement plan isn’t watertight
3 May, 2024

Denis Viljoen, Business Development Manager at Glacier



Playing it safe with your retirement plan could be an unsustainable approach in the long term. Here’s why experts suggest taking advantage of a combined approach to secure your financial future.


What is a conservative approach?


Often, ‘conservative’ and ‘safe’ are used interchangeably to describe a scenario where most risks are mitigated, giving you peace of mind. When investing in, for example, interest-bearing funds, this ‘safety’ is largely owed to a low risk of capital loss and low market volatility. But when it comes to your retirement planning, being too cautious can have the opposite effect: you could end up with an uncomfortable retirement after years of hard work. As Denis Viljoen, Business Development Manager at Glacier by Sanlam, explains: “Everyone deserves to retire with dignity. Unfortunately, if your money is invested too conservatively, you might wake up one day to the reality that your savings are just not going to afford you that dignity,” he says.


Why a totally conservative approach to retirement isn’t reliable


When you’re in an ‘up’ market, you want to enjoy a piece of the pie (i.e. investment returns). A conservative approach to investing doesn’t offer this. “If minimal risks are taken when investing because your focus is on generating constant cash flow, the underlying portfolio will tend to underperform during rising markets,” says Denis.


Besides returns, inflation is also a vital consideration when selecting the right retirement income solution. Again, a conservative approach doesn’t necessarily account for this, which means your investment won’t meet or beat inflation. “Equity exposure is vital for income to keep up with inflation,” Denis continues.


True safety in diversity


Diversifying your asset allocation is vital for mitigating market risks and securing your capital in the long term. With this approach, you can rest assured that a single event won’t wipe out your entire portfolio. “In a diverse portfolio, assetsThe value of some assets such as vehicles, will decrease as they are used and eventually wear out over time. are less correlated; when one rises, the other one’s value may fall, and vice versa,” explains Denis. “It’s your best defence in a financial crisis.”


To achieve this, look at including more growth assetsThe value of some assets such as vehicles, will decrease as they are used and eventually wear out over time. that are uncorrelated in your portfolio to decrease volatility. Lower volatility leads to additional returns when income is taken because it helps manage what we refer to as sequence risk – the risk of your portfolio losing value during a market downturn just before or after retiring. “Look at diversifying between offshore equities, local bonds and local equities,” Denis suggests.


Diversification through a combined approach


On average, retirees draw down more from their retirement capital than guideline recommendations, shares Denis. The impact of this is a greater risk of running out of capital, and in instances where leaving a legacyAn inheritance passed down to the next generation to beneficiaries is a retirement goal, the opposite happens – with beneficiaries often having to take care of their retired loved ones instead. “Combining different retirement income solutions balances capital preservation and growth,” says Denis. “This allows you the freedom to live your life fully and enjoy peace of mind.”


Combining a life annuity and a living annuity harnesses the benefits of both solutions for an optimal income that takes care of fixed costs and ad hoc expenses. “The advantages of buying both these solutions are that you’re guaranteed an income for life, you can benefit from possible income growth in the future since your investments have market exposureThe possibility of an investor experiencing losses due to factors that affect the overall performance of financial markets in which he or she is involved, and when you pass away, the remaining capital in your living annuity can be passed on to your dependants,” explains Denis. You also have the flexibility to adjust your income percentage if markets take a dip.


The benefits of an asymmetric approach


Unlike a conservative approach, an asymmetric approach reduces volatility and allows for a more growth-orientated approach in a portfolio. How does it do this? By combining a portfolio of traditional asset classes and uncorrelated sources of returns, the risks of capital loss and volatility are managed so that you share in only one third of market dips and two thirds of market ups. Because risks are managed, you enjoy a smoother return profile. Besides reducing volatility in returns, asymmetric returns are designed to preserve capital and offer downside protection. This approach is crucial when managing retirement assetsThe value of some assets such as vehicles, will decrease as they are used and eventually wear out over time., as it focuses on compounding sustainable positive returns and increasing the probability of achieving financial survival.


The right solution for you

A financial adviser is key to helping you realise your retirement income goals. By reviewing your assetsThe value of some assets such as vehicles, will decrease as they are used and eventually wear out over time. and liabilities to determine your total wealth, they can partner with you to answer questions you have about your retirement and suggest the right income solutions depending on your financial standing, risk appetite, longevity risk and sequence risk. “At Glacier, we offer the whole spectrum of solutions to suit a client’s needs,” says Denis. “There is no place for a single product sell anymore. A financial adviser has to consider all offerings in combination to meet a client’s very personal, specific needs.”


Partnering with a financial adviser allows you to have confidence, knowing that you are moving in the right direction to realise your retirement goals, but are also in trusted hands to receive ongoing advice as and when your retirement goals change.


Please consult with a financial adviser before you take any action regarding your savings and investments. This article does not constitute financial advice.






@Denis Viljoen
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