You should work towards ensuring you don't outlive your retirement savings, as people are, on average, living longer, says Darryl Hannington, a portfolio manager at financial services firm Anchor Capital.
Longevity is increasing, which makes retirement planning even more difficult, because people are living for more years until they die.
Hannington says the key consideration when planning for your retirement is “to make sure that your money outlives you”.
He says retrenchment is potentially devastating from a retirement planning point of view because when asset managers, wealth managers or financial advisers set out the retirement plan of their clients, they make the assumption that clients will work until their retirement age.
Hannington says that when you invest in offshore markets, you are exposing yourself to a number of risks, including economic risk and currency risk.
“As South Africans, our lifestyles and our expenses are based in rand. So I need to pay for my monthly expenses, either when I'm working out of the salary that I have or in my retirement out of my savings, in rand. So what that basically means is that if I transfer all of my retirement savings after I have retired or, importantly, while I’m still working, regulation 28 of the Pension Funds Act says you can't transfer more than 30 percent of your wealth offshore.
“So you do have restrictions, but into retirement, if I choose to transfer 100 percent of my money into US dollars, as an example, to invest and the rand goes through a period of protracted strength, it basically means that my rand expenses in relation to my dollar investment have gone up and I am drawing at a stronger rand against the dollar, which means that I am drawing more dollars every month and it might affect my retirement plan,” he says.
He says that South Africa is fortunate in that although equities is a phenomenal long-term investment - albeit quite bleak over the past five years - the lower-risk asset classes such as bonds and cash offer very attractive yields.
“In fact, South Africa has among the best after-inflation yields in the world. So what that means is that you do have the opportunity to look after your rand expenses with your higher yielding, lower-risk assets, and potentially then you look for growth in your offshore equities, because, regardless of how great an investment the JSE has been over a very long period of time, the JSE is a concentrated equity market and, unfortunately, given some of the corporate failures over the last five years, it has become even more concentrated. When you go overseas your choice of assets is in the thousands, so it is a very complicated world out there but your choice is incredibly vast,” he says.
Hannington says an important consideration for South African investors considering investing overseas is whether they are investing to live there or merely because it makes sense to do so.
“The bottom line for the South African investor is that when they invest overseas, they invest there because, one, it makes sense from a diversification point of view, because no one knows what the future holds.
“Whether that is economic, whether that's political or market related, there will always be uncertainties, or more uncertainties, in emerging markets, of which South Africa is one, than in a developed market."
He says investors, both locally and internationally, hate uncertainty more than anything else and where there is uncertainty they tend to avoid investing there and investors needs to balance how much growth they want and how much risk they are willing to take.