Retirement planning is at best a very precarious exercise for most people.
It entails the calculation of a financial target at retirement date and invariably relies on various assumptions which includes inflation, investment growth, contributions, costs and expenses as well as retirement date.
Most financial planning includes an assumption that the investment vehicles selected to reach the financial target will grow, net of expenses, at between 2% and 4% per year faster than the inflation rate.
I have never seen or done a retirement plan with an assumption that the growth of investments will be less than inflation. That, after all, will require a change of strategy and the search for alternative investment vehicles to achieve the expected return, wouldn’t it?
Historically these projected investment returns have, by and large, beaten or equaled the inflation rate over most periods of time. There might have been a year or two, as a consequence of sharp dislocations in markets, that the inflation-plus targets have not been achieved but subsequent years of inflation-beating growth have managed to push the returns over any five-year period back into positive territory.
I attended a seminar a while ago where the speaker indicated that there has only been one five-year period in the last 50 years where the returns where less than inflation, and this was in the period following the Rubicon-speech of former South African leader of PW Botha.
Most South Africans saving for retirement mostly have two primary sources of inflation-beating assets to fund it: the one is their traditional saving instruments linked to the JSE, namely pension and provident funds, retirement annuities and stock market portfolios. The other, of course, is their investment in residential property, either as a primary residence or as a second or third income producing property.
As things currently stand, both these sources of capital growth and income are under immense pressure to deliver inflation-beating growth.
The reality is that over nine years now residential property prices on average have not grown an iota against inflation (down 23% in real terms) while the JSE is now under water (against inflation) over one, two and three years and barely positive over four. With the current outlook on the market, I do not see a sudden upward turn in company earnings and prices on the JSE soon.
Added to this, the expected rental incomes on buy-to-let properties have also plummeted in recent years, all adding up to a fairly bleak scenario for everyday investors planning their retirement.
Retirement planning in shreds
In short: whatever you thought your retirement capital was going to look like five or even ten years ago, has been blown out of the water.
The retirement prospects for most middle-class South Africans have been downgraded by a combination of the sideways movement in the residential property market as well as the below-inflation returns earned by their retirement funds over the last three years and soon to be four years.
Most people planning a retirement are now facing a decline of anything between 20% and 30% in the expected retirement capital they were banking on.
The retirement crisis has just become much more severe and, for many people already looking forward to an underfunded retirement, much financial pain and suffering awaits if they continue to disregard their current status quo.
SA’s financial institutions love to throw around the statistic that only “6% of all South Africans will be able to retire care-free and with the same living standard pre-retirement”. This is patent rubbish and according to my calculation, that number is closer to 2% of the overall population.
The source of that 6% was an investment book called Making money made simple, written by Australian Noel Whittaker in 1992, which I re-wrote for the South African market and, much to my surprise, became a best-selling book in that year.
Whittaker was using statistics relating to Australian retirees, a materially wealthier country on average than South Africa.
Returns on the JSE
The returns on the JSE over the last one, two and three years are now deep under the water when compared to the inflation rate. It’s not much better for the average retirement fund, despite the fact that they are allowed to invest up to 25% of their capital offshore. The offshore returns have not been high enough to offset the low returns on the local market.
As a proxy for the returns of pension funds, I have used the average returns of the Asisa SA multi-asset (high-equity) portfolios for the average pension/provident/retirement annuity and preservation fund.
This shows that this sector has returned 1.1% over one year (CPI 5.2%) and 4.4% pa (CPI 5.3%) over three years.
The outlook for the JSE does not look that rosy either. The proposals contained in the newly-released Mining Charter last week will lead to a flood of money out of this sector.
The JSE in recent times has also become something of a one-trick pony: namely Naspers. Naspers is now a discounted proxy to invest in a Chinese internet company Tencent and has a trailing PE of over 100. Naspers at current values makes up almost 20% of the total market capitalisation of the JSE.
Residential property prices still declining
Average residential property prices have not recovered in real terms, i.e. after inflation, since the collapse of the market in 2008/9. According to the latest FNB property barometer average prices are now down 23% when the inflation rate is taken into consideration over the same period of time.
Certain sections of the market are also threatening to show nominal declines, especially in towns and provinces that are badly mismanaged or find themselves under administration. The collapse in the infrastructure in many towns and even smaller cities are having a detrimental effect on property prices.
As previously pointed out, I often travel through our countryside and visit many towns and cities en route. I make a point of turning off the highways in order to drive through the suburbs and what I increasingly experience is nothing short of a dramatic collapse in former pristine suburbia.
I was in Kimberley recently and again I drove a couple of blocks north of the city centre. What I saw were mansions, harking back to former glorious days, in rack and ruin. You do not see a For Sale sign in these areas anymore. It would be pointless; there simply are no buyers anymore.
This scenario is repeated across many little and not-so-little towns in most parts of South Africa.
The retirement planning trajectory of countless South Africans in times gone past was that the appreciation of their primary residence played a major role in filling the gap for a shortfall in conventional retirement planning.
Home-owners relied on that handy price-spurt in the last five or ten years before retirement to boost their retirement capital. In many cases one’s home was a substantial asset that could be sold in order to downscale and move to a smaller residence or retirement complex. Not so any more.
Another favourite retirement strategy, which reached a crescendo in 2007, was the buying of second and third properties for rental. In 2007, just before the property bubble burst, almost 25% of all property purchases in SA were in order to re-let. I have twice written about this on Moneyweb. Many investors saw this as a surefire strategy to create an income stream in retirement. Money was freely available with banks literally throwing money at wannabe rental tycoons. It was not uncommon for people to get bonds from a wide number of banks. Fortunately, this has been largely stopped by the National Credit Act of 2007.
Here too these retirement plans are going up in smoke. Rental growth is lagging far behind the inflation rate as tenants are simply not able or willing to accept inflation-adjusted rental increases year after year.
Increase your rental too much and the tenant simply packs up and rents somewhere else.
I have a rental property were the gross rental is not much higher than five years ago, but my costs in the form of rates and taxes and maintenance has doubled. Most people I speak to with rental properties have had a similar experience: costs up but rentals sideways or down.
And then there is the increasing tendency of tenants paying late or simply not paying at all….
The latest residential rental survey from Tenant Profile Network (TPN) shows that on average only 65% of tenants nationwide paid on time. The rest either pay late, or not the full rental or not at all. And this trend is getting worse.
Imagine investing your money in an institution where you only receive 65% of your dividends or interest income, with the rest (if it all ) paid at some uncertain time in the future. Or having to argue with the issuer of the investment that you are legally entitled to the promised interest or debt.
Right now I have two members of my immediate family battling with tenants who have simply stopped paying their rent and refuse to move out, relying on the PEI Act to provide them with free housing. And in both cases these family members are paying the bonds, rates and taxes and water and lights.
According to TPN, the percentage of national tenants paying on time has declined from 73% in 2011 to 66% in the first quarter of this year. About 25% pay after a period of grace while almost 7% just don’t pay. Full stop. Period.
Growth in rentals has also come to a shuddering halt, with the exception of the Western Cape. Rental growth in the Western Cape is still above 12% year-on-year while the average is 4.7%. There is still some life in Gauteng with rental growth averaging 5.7%, but this is still below the inflation rate.
If one strips out the strong rental growth of the Western Cape, it is quite easy to conclude that the rental growth in the seven other provinces is flat and in some cases, hugely negative in nominal terms. For those readers who have not read The Bluffer’s Guide to Economics, nominal declines means prices are falling in rand terms.
Mismanagement of the economy
It would be churlish and unfair to blame all of the above on Zuma and the disastrous economic mismanagement by the ANC. Zuma and the ANC are not to blame for the Great Financial Crash of 2008/9, but have most certainly played a central role in the subsequent economic decline which has led us to being downgraded, for all practical purposes now in junk or soon-to-be junk territory.
This is a homemade economic collapse. With the exception of tiny Iceland (population 300 000) are we the only modern industrialised country in the world currently in a recession? There are other countries in recession and they include Venezuela, Equador, Zimbabwe and South Sudan. Boy, are we in exclusive company now….
Business confidence is back to 2009 levels while consumer confidence, already at 15-year lows, is set to fall even further in the wake of the midnight firing of Pravin Gordhan and the subsequent downgrades by the big three ratings agencies.
* Moneyweb and Brenthurst Wealth are currently holding the annual SA Quo Vadis series of investment seminars. The next seminar takes place in Stellenbosch on June 21. Bookings can be made here. For more information go to www.brenthurstwealth.co.za.