Why the low interests rates are bad for retirees
Many South Africans have celebrated the recent interest rate cuts and the fact it is at record lows. Debt is cheaper, home loans and car finance is more affordable – this is all good news in the current bleak Covid economy.
However, it is not good news for everyone – pensioners who are drawing an income from cash investments will be suffering a substantial decline in their monthly income – as much as a third of their earnings may be gone, which is a large amount of money to do without when living on a pensioners budget.
This is according to Grant Alexander, director at Private Client Holdings, who offers the following advice for retirees:
Revisit your budget
“It is important to revisit your monthly budget and make certain that the level of income being drawn from your investments can last over the planned retirement period. If necessary cut any unnecessary expenses and only keep the very bare minimum.”
“Draw as little capital as possible as a monthly pension because each withdrawal while markets are down locks in financial losses. To continue drawing a high income when returns are low could permanently damage your retirement fund - the trick is to balance out your income needs with the essential need to preserve capital for as long as possible.”
“If necessary, draw on the expertise and guidance of a certified financial planner, who will construct a forward-looking cash flow exercise that will guide your spending habits,” advises Alexander.
“The best thing to do if you have the time is to stay invested and wait for your investment to improve with the markets. Many, however, won’t have the luxury of choice – either in terms of the timing of their retirement, or the need to access now much-depleted capital.”
“The reality is that many people drawing an income from a living annuity or from discretionary assets are, in fact, drawing down on capital.”
Look ahead – buy now if you can
According to Alexander, in this type of market it is easy to be blinded by all the sentiment and short-term volatility prevalent in the system. “This has the potential to dissuade you from acquiring appealing long-term investments opportunities at attractive prices. You won’t have to search too long and hard to find some good investment opportunities – you just have to take a more rational view.”
Diversification remains essential
“The diversification of investments is essential to a good wealth management strategy. Currently, bond yields are high and investors could consider government bonds which are offering above-inflation returns, or RSA Retail Saving Bonds – which also enjoy tax exemption on interest earned for pensioners.
In fact, Alexander says that pensioners who have diversified portfolio’s and who have investment portfolios that aim to beat inflation over the long term, will have even benefitted from the drop in interest rates as their fixed income assets will have improved in value. “So whilst your short term withdrawals may have suffered, the component of your portfolio allocated to beating inflation over time will have improved.”
Surviving volatility with a good fund manager
It’s at times like these, when financial markets are shifting and investors nervous, and when the value of a diversified, inflation beating portfolio becomes evident, that the shrewd investor realises the true worth of a professional financial planner who keeps you on course to meet your investment goals.
“One of the qualities of a good fund manager is the ability to apply a consistent investment framework over full market cycles, but also being mindful that the fundamental drivers of economies change over time,” concludes Alexander.