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Low risk may deliver unexpected consequences in retirement

It is as important to have a diversified investment approach in retirement as it is while accumulating wealth.

Fear and anxiety about market volatility, coupled with a low-growth environment, often drive retirement investors to low-risk investment options in an attempt to protect their capital. Avoiding risk in retirement is prudent in many instances, but in view of significantly improved longevity, this may have the unintended outcome of completely depleting capital.

Even retirement portfolios need to include some riskier asset classes in an income-generating portfolio. Many investors make the correct choices during the wealth-accumulation phase of their lives, through investing in diversified portfolios with exposure to different asset classes, locally and offshore. When retirement day arrives they become instantly risk averse and fearful of market volatility and bad news. Research has shown that the emotional response to bad news about investments is far more intense than the happiness experienced when markets rise.

The risk averse approach may have dire consequences for the income needed during retirement, as investors could run out of money completely if no capital growth is achieved.

Currently, legislation allows an investor to draw an income of between 2.5% and 17.5% per annum on his/her living annuity. With interest rates at a two-year low (and expectation of further repo rate cuts) coupled with a drawdown level of between 6% and 8%, the low-to-no-risk investor will experience a negative real return, after fees and inflation. Depleting capital is a very big, real risk. In most instances investors realise their mistake too late to rectify the situation.

By taking on fewer growth assets the investor is effectively reducing his/her income-earning potential by at least ten years, compared with an investor who included a balanced type portfolio in the overall investment strategy.

This is what the outcome will look like with different selections.

Moderate growth asset allocation portfolio – real return of 4%: You will most likely deplete your capital at age 83.


Conservative asset allocation portfolio – real return of 1%: You will most likely deplete your capital at age 76.


Aggressive asset allocation portfolio: The aggressive portfolio will result in a 6% real return after retirement. Once the investor is no longer bound by Regulation 28 constraints for retirement investment selection, [it] allows for a more aggressive long-term investment approach. While more volatile, this offers a much stronger probability that the capital will not be depleted.

These illustrations are based on an annual income percentage of no more than 5% and clearly show the importance of taking on risk in a retirement income portfolio.

Living to a 100 was considered something special and unique three decades ago, as the average life expectancy was around 70 for women and between 60 and 65 for men. Thanks to healthier lifestyles and medical advances, living to 90 and older is nothing out of the ordinary any longer and retiring at 55 or even 60 is not realistic. Contributing to retirement funds during income-earning years should be an investment and savings priority.

The below graphs illustrate the different outcomes by investing in an income fund portfolio (grey line) vs investing in a low-equity portfolio (greenish line) Making just the one change by investing in a low-equity portfolio can result in an increased end value of around R3 million over a term of 15 years, where your initial investment amount was R10 million. In addition the income generated in the low-equity portfolio can be as much as R1 million more than in the income fund portfolio, over the 15 years (graph on the left), as a result of additional revenue generated by dividends received that get reinvested in the portfolio.


There is a vast investment universe offering a wide range of options in different asset classes, each with different levels of risk. It is as important to have a diversified investment approach in retirement as it is while accumulating wealth. Low risk may deliver an unintended high risk situation: depleted capital and many years of living still ahead.

It is highly advisable to consult an accredited financial advisor to devise an investment plan suited to your individual requirements and goals.

Sources: Morningstar, ASISA and Prudential Investment Managers

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