Most, if not all, retirement planning books I’ve read (or even written myself) have good outcomes in the title. It stands to reason. Why would you buy a book that tells you how to plan for a dreadful retirement?
If you won’t buy or read such a book, why then are most people still doing exactly that in their retirement planning, but somehow expect to see a different outcome?
And why then are people still lending out their ears to people who keep on advocating (peddling would be a better term) for the same old investment strategies that have not worked for many years now. In the case of residential property, it’s now 10 years of no growth and in the case of retirement funds, it is soon coming up to five years of no growth. As far as retirement funds, returns have not kept pace with inflation over five years and soon, seven years.
Let’s take the residential property market for instance. For years I have been warning about the stagnant performance of the local housing market, only recently joined by fellow Moneyweb columnist Hilton Tarrant who started scratching under the surface of the published statistics on the housing market.
The first article in my buy-to-regret series back in 2014 caused an uproar from the property-loving fraternity. It also resulted in me appearing on some TV programme on eNews where I was verbally assaulted by some property spokesperson who described buy-to-rent as a way of fast-tracking to wealth and financial independence. Maybe we should have that debate again, some four years later.
The most recent edition of Financial Mail carries a thorough analysis of the residential property market (‘Housing Sales Tumble’). Yet the perennially optimistic spokespeople keep on with the same old mantra, “Buy now before the next upturn” (Samuel Seeff, chairman of Seeff Properties). My inbox almost daily fills up with various kinds of investments schemes, all proclaiming residential property to be on the verge of an upturn and that those who delay will pay the price.
Well, I’m not buying it and I’m recommending that readers – those who still haven’t been burnt by the residential property market – stay away for a while longer.
Yet, time after time, I still see people who, at retirement or pre-retirement, insist on buying ‘one or two apartments’ to provide an income for them in retirement.
They normally take this advice from the property agent who has no further interest or responsibility in what happens to the ‘investment’ after it has been purchased. The euphoria with this income-producing strategy normally lasts about five years when the cumulative effect of declining rentals (in real terms) and rising rates and taxes (in real terms) start eating away at your care-free retirement income.
Rates and taxes funding ANC cadres
Rates and taxes have become another way for cadre-deployed ANC members to take control of the financial spigots known as municipalities. Many parts of our country have been laid to waste by wholesale looting and theft by ANC-controlled councils, who have diverted funds collected from much-needed infrastructure maintenance to wages, salaries and very expensive motor cars for the Wabenzi. Your property and mine, dear reader, pays the price for the unfolding disaster at municipal level around the country, with the exception (mercifully) of the Western Cape.
Yet so many people seem to think that their property will somehow be the exception to the rule and magically produce a return greater than inflation over the longer term. We are all in the same boat, dear readers.
Many years ago I found myself in a debate on Radio 702 with someone who was trying to convince listeners that investing in a couple of apartments in Hillbrow and Berea would be a great investment, at a time when the regeneration of the inner-city of Johannesburg was all the rage.
Today these properties have virtually no value and while they might produce an income of sorts, it is almost impossible to sell properties in these areas. So much for that retirement strategy.
The outlook for the residential property market is also clouded by uncertainty created by the ANC’s new policy initiative to expropriate land with compensation, despite what Cyril Ramaphosa has said. This will and is having an effect on property prices, yet to be fully reflected in the official numbers. That will come soon enough. Many property owners, including myself, simply cannot sell their houses. So if it doesn’t move, you cannot measure it.
How to save for your retirement
Let’s start with investors over the age of 55 who have some money locked up in a retirement annuity (RA) or preservation fund, both entities controlled by Regulation 28, which limits your offshore exposure to 30% of the investment. At age 55 you can and should consider maturing your RAs and/or even your preservations funds. Who says getting older doesn’t come with all least some benefits?
Here my advice is blunt and to the point: Mature your RAs and preservation funds, take out whatever cash you can get and move what remains into a living annuity. Returns over the last five to seven years have been abysmal, ranging from between 2 and 6% gross per annum. I spent some time on the websites of our largest three insurance companies over the weekend and most of the various funds/portfolios were returning the same, below-inflation returns.
And yet, year after year, the investment industry in the weeks and months heading toward the end of February fires up its massive advertising campaigns, urging investors to put new money into these defective products. The big sales hook is the so-called tax savings you can make. This is only partly true.
What is the point of putting money into an investment product that has not beaten inflation for periods now of up to seven years, on the basis that you can reduce your tax now? What is often missed is that you are merely postponing taxes as, one day, as sure as the sun shines, you will be taxed on the income you draw from either a living annuity or a guaranteed one.
How much Regulation 28 is costing investors is inadvertently revealed by the returns on certain 100% offshore retirement annuities, those set up by investors before a crackdown by National Treasury on these options. Some years ago investors could still invest 100% offshore in an RA by making use of the overall offshore allowance of the investment company. This was changed, for reasons I do not know, so that investors are now restricted in terms of their offshore exposure at product level.
There is a lucky group of RA investors who have been earning around 14% per annum over the last five years, according to the Liberty Life website, as compared to returns of between 3 and 6% on the Reg28 offshore portfolios – almost 10% better than the Reg28 funds on the whole.
If ever you want actual proof of what Reg28 is doing to investment returns, here it is, in a real-life example: more than 10% per annum over five years and possibly more.
And I don’t see this changing.
If you are over 55 and still want to make contributions into an RA (for tax reasons), mature the single premium RA in the first week of the next tax year and move the capital 100% into an offshore living annuity. First establish whether the investment platform allows a 100% offshore allocation. This is vitally important. If it doesn’t offer 100% offshore exposure, find another one that does.
In December 2017 I pointed out that investment giant Allan Gray had imposed a maximum limit of 25% offshore exposure within its living annuities. There could not have been a worse time for investors retiring to have an offshore restriction on their retirement capital. Since then the rand has weakened by more than 20%, the JSE is down 15% for the year while offshore investment returns are between 15 and 20%.
To me, the decision by Allan Gray was deeply cynical and driven by its own commercial interests. You see, for a large investment firm, its offshore allowance is a valuable asset. Why go and make it available to existing investors if you can go and sell it to new investors and hence increase your assets under management and profits.
I understand that Allan Gray has since increased its offshore allowance to 60% of portfolio value, but I still want the freedom to have 100% of assets abroad, should this be appropriate.
And finally, I tried to establish from Asisa (the Association for Savings and Investment South Africa) how much money is invested in Reg28 funds, but was told they don’t keep track of these numbers. I suspect there must be hundreds of billions of rands invested in these poorly-performing funds. What worries me is that there are options investors can and should consider to save for their retirement, especially if they are older than 55, but they are deliberately kept in the dark by the investment industry.
So if you want your retirement to have any chance of being ‘carefree’ and ‘happy’ I suggest you urgently move what you can away from Reg28 funds in order to get a better chance of growing your retirement capital. Your current investment strategy of residential property and Reg28 controlled pension funds is not going to end up well.
The views and opinions shared in this article belong to their author, cannot be construed as financial advice, and do not necessarily mirror the views and opinions of Moneyweb.
Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at firstname.lastname@example.org for ideas and suggestions.