I’m very worried after investing R1 141 000 of my Old Mutual (OM) living annuity into its Global Equity Fund A in mid-October 2017. It did fantastically over November, but it started going down at month end and I’ve now lost R83 000. This is the only living annuity I have for income, and I only draw 4.5% income per annum from it, and must try and preserve my capital with some growth as I’m retired. I know all about the stronger rand contributing to my losses too. But I don’t know whether to switch into a safe money market fund as soon as possible, to preserve what depleted capital I have left, or wait for my [fund] to recover my losses?
If I switch now, according to what I draw, [it] will give me no growth and possibly further deplete my capital, because it has reduced so much now. After consulting with many of them, OM advisors and managers can give me no answers on a way forward.
I’d welcome any news about a very real possibility of this SA Global Equity Fund of mine recovering the serious losses to my living annuity it’s made. If only it will recover, then I will be immediately out of this fund and into another more stable, lower risk one. And never will I trust global ones again, for sure. The ups and downs of it are just too much for my more stable mentality.
Angelique Visser - Baraza Wealth (Pty) Ltd
After working for 30 to 40 years, retirement is definitely an event that most people look forward to. Because one does not have to be at work all day anymore, retirement is often seen as an opportune time to travel, take extended holidays or engage in activities such as golf and tennis.
For most people, unfortunately, retirement is also the time when serious financial decisions have to be taken. As these decisions will have an effect on the rest of one’s retirement, it is strongly recommended that a detailed retirement plan is compiled, to ensure that all aspects are taken into account and informed decisions can be taken to ensure the best possible outcome for one’s circumstances.
A retirement plan should include the following:
A realistic budget has to be compiled to determine what one’s monthly income requirements will be after retirement. Often the amount is less due to the home loan having been paid off, but one should take into account that more funds may be required for increased medical costs and lifestyle changes, for example travelling and entertainment.
Calculate the capital requirement
The amount required monthly and the period that this amount will be required after retirement will, together with factors such as the inflation rate and expected investment returns, determine what the capital amount is that one requires to provide the monthly income for the chosen period.
If the capital amount required is less than what one has provided for, which is too often the case in practice, the following may be considered where possible:
- Adjust one’s budget (this may even result in a lifestyle change);
- Do not rush into retirement; try to work longer; and/or
- Start an income-generating hobby.
Statistics confirm that less than 5% of people can stop working at retirement and live off the amount that they have provided for up to retirement for the rest of their lives.
Formulate an investment strategy
This step entails a few actions and will also be unique to each person.
- Retirement fund withdrawal
Decide whether a withdrawal should be made from one’s retirement fund and the amount if a withdrawal is made.
Currently at retirement one is allowed to withdraw up to R500 000 from one’s retirement funds without paying income tax on the withdrawal (total amount of all withdrawals). This amount, will however, form part of one’s personal estate after withdrawal and be subject to estate duty at a rate of 20% and not be projected against creditors.
- Reserve fund
Set up a reserve fund to cater for emergencies and unexpected life events. The norm is to have enough funds available to cover one’s monthly expenses for at least three to six months.
- Select investment vehicle
The two main products that can provide one with an income from retirement funds are guaranteed annuities – an insurance-type product, or a living annuity – an investment-type product. Both have advantages and disadvantages and the most suited should be selected for one’s specific needs.
- Portfolio construction
One’s retirement portfolio should be constructed based on one’s age, risk tolerance and income goals. Normally a portfolio will be focused on income and capital preservation the older a person is. The result may be a lower allocation in equities, which won’t give one the returns of equities, but will be less volatile and will provide income to meet monthly income requirements. This, however, is not a blanket rule which is applied to every situation as the amount available at retirement will also play a significant role when a portfolio is constructed.
Investment fees should also be considered when a provider is chosen. The industry’s effective annual cost (EAC) standard requires complete disclosure and can guide one in this regard.
Once the investment strategy is adopted and implemented, one should stick to it despite changing market situations, as investment strategies are based on long-term views.
As explained above, a step-by-step process has to be followed when a retirement plan is compiled and an investment strategy formulated.
It will not be possible to advise whether a specific investment is suitable or not without having gone through the entire process.