Are you planning on retiring soon? Chances are you’re worried about the current market turmoil more than you’ve ever before.
Personally, I’m in the middle of my working life, but over the last 18 years, I’ve helped loads of clients move from relying on a steady employment income to relying on income from a personal accumulation of investments and assets. I’ve seen first-hand that, no matter how much money a person/family has, there is almost always an inherent anxiety that there won’t be enough money to retire comfortably and a natural aversion to having to ask children for help.
This is all normal but, understandably, makes for a stressful transition from working to retirement. Now you have to contend with financial markets that have fallen off a cliff and an even-worse economic outlook than we had before.
Hopefully, you’ve been saving for the last 35-40 years, and on average, your investments have delivered a healthy return above inflation. Unfortunately, this doesn’t take away the reality that your investments may be worth 10% less than they were at the beginning of the year, that we’re in a period of pitiful JSE returns, and that we’re likely heading into a couple of months of uncertainty as we figure out the short- and long-term impact of Covid-19.
Do you have enough money to retire?
The first question you should ask yourself is whether you have enough money to retire. If the answer here is definitely no, then it’s no good shrugging and hoping for the best; you may be ok for the first decade but you’ll find yourself in a horrid situation at a point in your life when there’s little you can do to rectify the situation. You essentially have two choices:
- Cutting your income needs to a point where your capital can sustain the drawdowns, or
- Extending your career (this will allow your capital to grow) or doing something that can supplement your income for a few years, while saving as much as you can.
If you are unsure of the long-term suitability of your savings, then the above applies to you too.
While I truly believe that seeking professional help can add significant value, and cost savings (yes, savings) to your life, you must do some self-education, even if you already have an advisor. This will help you to ask the right questions and know broadly what your alternatives look like.
Focus on what you can control
One thing I’d definitely caution against is making any short-term, knee-jerk decisions that will affect you for the next 30-40. Your retirement plan could well need to cover the same number of years that you worked for, and thus needs to be approached with a sensible long-term approach; a lot can happen over 30 years! Importantly, I think the best thing is to focus on what you can control and make sure you have a detailed, yet flexible investment strategy in place.
Here are some plan foundations:
- Map out a strategic asset allocation (your exposure to cash, bonds, property and equity both locally and globally) that has enough exposure to growth assets. There’s been a huge amount of research done by Ninety One Asset Management (previously Investec Asset Management) around equity allocation in a living annuity. They have found that:
- A living annuity portfolio should allocate 25-40% to equities for low starting incomes in the range of 2.5-3.5%.
- As initial income levels increase from these low levels, annuities require more exposure to equities – as high as 75% – once initial income drawdown levels reach 5%.
- A living annuity requires a consistent 20-35% exposure to offshore equities, irrespective of the size of the initial income drawdown levels.
- This research is focused specifically on living annuities and doesn’t consider a portfolio outside of the living annuities; that said the principles are noteworthy.
- While it’s important that you have sufficient equity in your portfolio, you don’t have to be at your targeted allocation from day one. Know where you’re going and how you are going to get there. This may mean drip-feeding cash into your equity assets over, for example, a 12-month period.
- Some people will be tempted to climb into markets now that they’ve come off. I’d still maintain that a cautious approach makes sense. The balance of probabilities is that markets, and currencies, are going to be all over the place for the first half of this year.
- You may have decided that retirement was a good time to upgrade your cars and go on a long (well deserved) holiday; I’d propose rethinking this for the time being. Taking too much income and capital at the beginning will have a long-term impact on your capital’s sustainability. If markets continue to oscillate, any drawdowns upfront will crystalise the losses, so be as conservative as you can with your big-ticket spending.
- Sequencing risk comes about when doing retirement calculations, as most calculators assume your returns happen in straight line i.e. a certain percentage every year. On the basis that the calculator cannot be adjusted for this, using a very conservative annual return will overcome some of the risks.
- Make sure you have enough cash in your reserve to avoid unnecessary drawdowns on long-term investments. We know that, over time, the return on cash results in capital erosion (return after tax could be below inflation) but having some cash in a portfolio is a good practice.
Trying to summarise the above, it’s going to be important to lift your head above the noise and focus on your high-level strategy. Once this is in place, adapt it for the environment. Take your time making sure your decisions are well-informed as you cannot undo your choices in a decade’s time. And lastly, get professional advice – a good advisor will have the experience, knowledge and resources to steer you through this turbulent time.