BOITUMELO NTSOKO: Welcome to the Money Savvy Podcast, I’m Boitumelo Ntsoko. Inflation is surging locally and in most parts of the world, raising concerns for many retirement investors about how their savings might be affected. If you’re wondering if there’s anything you can do to protect your money, or are looking for ways to grow your investments to combat inflation, then keep listening.
Gareth Collier, who is a certified financial planner at Crue Invest, joins us on this episode to share some of his tips. Welcome, Gareth.
GARETH COLLIER: Hi Tumi, thanks for having me back.
BOITUMELO NTSOKO: So why should retirees and soon-to-be retirees be concerned about inflation?
GARETH COLLIER: So the first thing with inflation is that it primarily affects the cost of living [as] we all experience it, whether it’s at the grocery store or the petrol pump.
What happens over time is that as items become more expensive, the cost of living goes up. And therefore, if you are in that phase now, where you [are] just before or you just about to head into retirement, you know, you’re exiting a period of your life where you’ve been actively working, and generating an income to a point where now your accumulated assets are going to have to try and support your lifestyle going forward.
Now, what you’ve accumulated, obviously, if you’re sitting with an investment strategy that isn’t targeting at least inflation, or returns above inflation, that accumulated capital, although it seems like a healthy lump sum of cash just before retirement, over time, it’s going to get dwindled away, because you’re going to be using more and more of it, to keep up with your standard of living, as inflation pushes prices up.
BOITUMELO NTSOKO: Now, when assessing your retirement portfolio and assumptions, should you then scale back on your spending assumptions?
GARETH COLLIER: Well, look, that’s a relative question for everyone, and it depends on the type of retirement you’re looking at doing.
If you’re at the point now, where you’re spending, if you are quite a frugal person and you’re already at that point where there’s not much wiggle room in your budget, you would need to make sure that okay, have I gone through the exercise to say, if I’m going to retire now, do I genuinely have enough?
For those who maybe have been planning, maybe all their lives, big dreams, and they’ve made large provisions sure, one of the options is to look back and say, look, maybe if I cut back my spending, I’ll sort of protect myself from long-term inflation by having a bit more invested by not spending down quite as aggressively.
But you know, having said that, from our side, as planners, we will often have the financial discussion, and we’ll do the modelling in terms of this is how we expect or project the finances to go.
But the other side of it is to say you also don’t want to get so obsessed by making sure your money lasts for as long as possible that you kind of forget to also live in the here and the now.
Invariably, if you’re getting to this exciting phase of retirement then ultimately what it means is that your time is your own now, and you’ve possibly got the freedom to go and do some of the things you’ve always wanted to do. And you don’t want to now go and necessarily deny yourself that just because you get so obsessed about making sure your money lasts.
So I think the point is, we really just try and find a balance between the two and just actively manage it – whether it’s on a year by year basis, or maybe meeting every half year, whatever the case is, just a little check-in to say, well, this is what I’d like to do in terms of an expenditure, is it appropriate? Or is it going to compromise my long-term planning from a retirement perspective?
BOITUMELO NTSOKO: Should retirees and soon-to-be retirees adopt a bucket strategy where they split their savings into different baskets, based on how soon they’ll need the cash? For example, the far off buckets can be allocated more aggressively, while funds for upcoming expenses in a year or two are invested more conservatively.
GARETH COLLIER: So yeah, look, the bucket sort of concept has been around for a long time. And I think ultimately, it comes down to each individual person, and how they would feel comfortable managing their money.
For some people, they’d like the idea to know that maybe for the next year or two years, maybe one of my buckets is just sitting in, say [a] money market [account], and regardless of market movements, I know that cash is going to be available, and some of it is applied to longer-term investing, and we’ll move money between those buckets as I need them.
And for other people, it’s a kind of a case of, well, we’ll invest everything, sort of along the lines of a reasonable long-term strategy, bearing in mind that when you [are] spending out of your retirement [funding], you might have a large lump sum invested, but you’re not disinvesting that full amount on a month to month basis, or maybe in six months’ time or whatever the case is.
As you go along and markets move up and down, you’re only selling little pieces of your portfolio each month to provide you with a lifestyle. And it’s quite interesting because there’s been a lot of research on this, looking at these two different concepts.
And what’s funny is that there [are] so many variables – you know that the beauty about numbers is you can manipulate them to suit your story.
But on the whole, they come out on a very, very similar even keel in terms of do you have your full portfolio invested along, sort of, one strategy? Or do you subdivide it very specifically in these different asset classes? Over the long term, it tends to have a very similar result.
So we kind of sit back and say, well, how does that individual feel about how their money’s invested? Are they going to sleep well, at night, knowing that their full portfolio has got market exposure, or maybe they’ll feel more comfortable in the so-called bucket strategy?
The other part to look at is to use it as a concept and then get very, very specific on your personal needs. Right, so, again, you don’t want either of them to be the default, or the automatic [option] that you go to.
If you know that you are going to replace your car in your third year of retirement, or maybe in six months’ time, then it’s absolutely appropriate to make sure that you’ve got those funds sort of side-pocketed to make sure that they’re available; they’re not exposed to market movements. Because also, you’re not hoping to live off those over the long term; you’ve got a very specific need and expenditure for that.
So it’s probably not even a question of one or the other. It’s more just a case of looking at your personal planning, and understanding what is appropriate for me and my family.
BOITUMELO NTSOKO: Now is offshore investing at this stage of your life a good way to inflation-proof your retirement portfolio?
GARETH COLLIER: Look, I think, maybe as South Africans, we tend to get swept up in the narrative that offshore automatically equals better. And always the struggle with investing is to try and remove or partition away the emotion in terms of how we personally feel versus how are we going to be most appropriately invested.
So if you look at, say, the last 18 months, the reality is that you actually would have been better off locally invested versus offshore. If you go to a period before that, then offshore was better than local.
So what we do know is that it’s going to [be a case of what you gain on the swings you lose on the roundabouts] and there’s no guarantee that just by holding things offshore, that is now going to negate any of the inflation effects.
They are sort of arguments as to where you should have certain percentages allocated, but that can be done on a greater sort of holistic overview. And there’s going to be times where holding a bit more offshore and a little bit less onshore and vice versa, is appropriate. So again, you can’t just sort of say, look, we’ll put it all offshore, and we’ll be okay. We’ll take a step back and say what are your specific needs? What are your objectives, what are your goals, what are your liabilities going to be, and then make sure that your portfolio is appropriately matched up to that.
BOITUMELO NTSOKO: And whatever tweaks can be made to your portfolio to offset inflation?
GARETH COLLIER: So probably the most common theme we see is that people, particularly when you hit retirement phase, because the reality sets in that whatever you’ve accumulated, this is pretty much it, you know, this is what you’ve got left to live off for the rest of your life, and enjoy the rest of your life.
And understandably, people tend to get a little bit more conservative with how they want those funds to be looked after. Because the challenge is you’ve got this large lump sum today, and you think about that money in today’s terms and that looks like a large lump sum. When you stretch it over 20 or 30 years, you realise you know how important it is to make sure that inflation doesn’t erode that purchasing power. So be careful of being too conservatively invested.
The word risk is bandied around a hell of a lot when it comes to investing, how risky is a portfolio?
But ‘risk’ is probably [an] inappropriate word. What you’ve got to think about is how volatile is that portfolio?
So you take an example, in 2020, when Covid really kind of took hold of the markets worldwide, around about March of 2020. In the space of about 20 days, we had a huge slide. Somewhere between 20 to 30% on paper is what would have – in inverted commas – been ‘wiped off your portfolio’. But now, that only happens in reality if you had to kind of switch out of it. If you had simply waited out those couple of months, you would have seen very quickly, there was a recovery.
Now that’s what we mean by markets are volatile. People tend to misappropriate that word risk and say, Oh, but hang on, if my portfolio moves around a lot, and it goes down to zero, it’s quite risky. It’s not necessarily risky, it’s more volatile. And if you look at it in terms of risk, and you look at if you invested too conservatively, then …
I would say if you holding too much money in money markets, cash, fixed interest, that sort of thing: those numbers tend not to keep pace with inflation.
So that also becomes a risk because the risk is that, sure, your money on paper – the values [are] not bouncing around so much like market movements. But what’s happening is, you can’t see it.
But the effect of inflation and what’s costing you at the till and what your monthly budget is looking like each year, the interest that you’re getting on those more conservative portfolios is not keeping pace with that.
So sure, the rand balance might not be bouncing all over the place, but how much you [are] having to take out of your portfolio is slowly but surely sort of snowballing over the years.
And what you’ll find is that if you’ve taken away too much capital too quickly, because you’re not getting enough growth, then you hit a bit of a slippery slope, because now you have to go from the extreme of being quite conservatively invested to where you have to drastically look at cutting your spending, if that’s even possible, to try and extend the lifespan of your invested money.
Or you’ve got to now say, well phew, now I’ve got to, you know, flip the switch in my mind and go quite so-called aggressive or risky with my investment strategy, because I’ve got to try and get the market to make up some losses that I’ve experienced by not getting appropriate growth over time, and inflation is now eating away at my purchasing power.
BOITUMELO NTSOKO: Just the last point, with rising inflation, we’re also seeing that central banks have been coming in and raising interest rates as well. How does that impact the current situation?
GARETH COLLIER: Well, look, interest rates are going to rise, they’ve been adjusted. We know the recent issue with Covid and things.
But the reality is, as much as your interest rate is going up, if inflation is sitting at 4% or 5%, but your interest rate is going up, and let’s say you’re holding interest-bearing investments, if that’s only going up by a quarter of a percent or half a percent every year, you’re still going backwards.
So yes, you’re making a few more rands and cents on your holdings in terms of interest. But again, relative to inflation, if it’s still not keeping up or matching at all, or possibly being above it, then ultimately over time, you still end up going backwards.
BOITUMELO NTSOKO: Thank you so much, Gareth. That was Gareth Collier, who is a certified financial planner at Crue Invest.