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Retirement planning in a topsy-turvy, uncertain world

Published May 11, 2022

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RANDS AND SENSE

By Theoniel McDonald

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We live in an era where the world literally changes daily, a world filled with war, pandemics, extreme weather events, disasters, and much uncertainty. For those planning their retirement, this can cause much anxiety and doubt. I hope I can help put your mind at ease by providing some guidance on the appropriate steps I believe one should follow.

Gone are the days that we wait until the seven o’clock news to find out what is going on in the world. Today we are all surrounded by the latest up-to-date news as it happens. During the Covid-19 pandemic we all became virologists and were up to date with infection rates, death rates and hospitalisation rates around the world. Now we are all following the war in Ukraine with the deepest anticipation as we realise how quickly things could escalate and spill over into the rest of the world. As this is unfolding, closer to home we are experiencing some of the worst flooding of our generation with billions of rands in damage and the loss of hundreds of lives.

All this noise undoubtedly causes much uncertainty, fear and concern when it comes to planning your retirement. Perhaps you are now approaching retirement, and the thought of delving into your retirement savings is keeping you up at night. But there is some comfort to be had: the only solution is to follow sound proven principles, which are often not very exciting and somewhat boring, but will deliver the best results.

So where do you start? Don't try to go at it alone! Increase your own knowledge base by all means, but find an experienced financial planner or wealth manager who can guide you through the process. Besides lacking financial and investment knowledge, we are at the mercy of several cognitive biases that will impact our behaviour. An experienced adviser or wealth manager will not only assist you with the tax decisions, product choices, and underlying asset allocations, but will also guide you with due consideration of your risk profile in stressful times when your natural reactions could negatively influence your investment decisions and outcomes.

Costs are important, but one cannot expect the input and guidance of a professional without paying a fair fee. The question is: what is fair to the adviser but reasonable in terms of the service rendered and the impact on your retirement capital? The starting point would be to understand how much you are paying, and what you can expect for that fee. Generally, you can expect to pay for the initial advice and/or retirement plan and then an ongoing fee for annual management and reviews. I would recommend that you get more than one quotation from reputable advisers or wealth managers. Ongoing costs include platform/administration fees, investment management fees and adviser fees.

If your retirement capital comes from a pension, provident, preservation or a retirement annuity fund, you will have to decide on a lump sum up to the legislated one-third maximum. Generally, this would be used for an emergency fund, to settle debt, and to invest in discretionary investments.

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The biggest factor to consider regarding the lump sum is the tax to be paid on it. Often retirees opt to take the full third to have the maximum discretionary capital available. This decision could result in a significant amount of tax being deducted, resulting in an erosion of capital that would be virtually impossible to recoup at this stage of your investment journey. A good yardstick to use is the tax on the lump sum in relation to your average tax rate.

One of the biggest factors that will influence the life of your capital will be the underlying asset allocation of your portfolio. This is the next step in the puzzle and will ultimately determine how long your income lasts, how volatile your capital is and how exposed you are to unforeseen local and global events. For example, if we consider the extremes, a portfolio that is 100% invested in cash will not be volatile but will have difficulty outperforming inflation over the long-term. Your biggest risk then is the likelihood that you will run out of capital. At the other extreme, if you have a portfolio that is invested 100% in equities (shares), the portfolio will most likely significantly outperform inflation over the long term, but comes with short-term volatility influenced by daily market movements.

If you are drawing an income from such a portfolio and there is a market drawdown, you would have to sell more units in the fund to provide the same income. In this way, the capital in your portfolio can drastically be eroded. To add to the complexity, one also has to consider government and corporate bonds, property, as well as all of these assets in the offshore space.

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The key therefore lies in building a portfolio consisting of a mixture of these assets to allow for sufficient capital growth while also providing a predictable income that will last your lifetime. A well-diversified portfolio will not only give you income security but can protect you against unpredictable changes in any one asset class, in the currency, or swings in local and global markets.

The next step would be to decide on appropriate products. These could include a living annuity, life annuities, discretionary products, endowments, and/or share portfolios. This choice is usually influenced by your income requirement, guarantee requirements, tax, and the liquidity of capital. Retirees often mistakenly first focus on the product before giving tax and asset allocation enough thought. These days, one can select a blend of guaranteed products and products that are exposed to markets, which allow for growth above inflation.

Disaster-proofing your retirement portfolio therefore relies on having a good adviser who will help you decide on the correct lump sum, asset allocation and products. This, combined with a mindset that ignores the short-term noise and focuses on your long-term investment strategy by regularly reviewing the portfolio, your income, and the underlying asset allocation, will give you the peace of mind to which you should be entitled during your retirement years.

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Theoniel McDonald CFP is managing director of Wealth Associates Central, strategic marketing director of Wealth Associates South Africa, and vice-president of the Financial Intermediary Association (FIA).

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