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How should you invest after retirement?

It might be wise to challenge conventional wisdom.
The best-of-both option … separating your capital into two parts, one conservative and the other more aggressive, can fund your income needs while generating long-term inflation-beating returns. Photographer: David Weaver

Traditionally, investors have been told that when saving for their retirement there is a standard path to follow. In the early years, when they are younger and many years from the end of their working lives, they can afford to take more risk and maximise their exposure to stocks. As they near retirement, however, they should become progressively more conservative with their money, moving from shares into cash and bonds.

After retirement, the most important thing becomes preserving capital. Investors should therefore be cautious with their savings so that their money is secure.

However, at a time when few people are able to retire comfortably, it is worth asking whether that model still makes sense. Are the traditional ways of thinking about investing after retirement still relevant?

Putting numbers to it

Consider someone who starts working at the age of 25. They put away 12.5% of their salary – the current average in South Africa – and work until the age of 60. After retirement, they draw an income from what they have saved that is equal to 75% of their final salary.

If you assume that this individual earns a return of 4% above inflation on their money through this entire journey, after all costs, their money is only going to last for 17 years. By the age of 77, their capital will be gone.

Source: Prudential Investment Managers

For Pieter Hugo, MD of Prudential Unit Trusts, that is a “fairly problematic” result. If that is what the average South African faces in retirement, then it’s clear that there is a significant problem.

As he points out, however, there are different ‘levers’ that an investor can pull to make that outcome better.

For a start, if they begin saving five years earlier, their money will last eight years longer.

Similarly, retiring five years later would also deliver an additional eight years of income. Since they would also only retire at 65, this would mean that their savings would last until the age of 90.

If they save more, that has a particularly notable effect. Putting away 18% of their salary instead of 12.5% would add 14 years.

The importance of the return

Finally, if they earned 6% above inflation for their whole lives instead of 4%, their money would never run out. That is quite an aggressive assumption however. South African equities have returned 7% above inflation over the last 100 years, but few people would be, or even should be, 100% invested in the stock market all the time.

What is particularly noteworthy for Hugo, however, is when those returns are generated. Assuming an investor earns 5% above inflation for their whole lives, this is what their journey looks like:

Source: Prudential Investment Managers

“If these are all the investment returns earned throughout your entire life, 87% is earned after retirement,” says Hugo. “That is quite scary and we need to think about it quite a bit, because when many clients, at age 60, come with their pot of money to an advisor, they say please help me to invest this money. It needs to last for the rest of my life, so can we please invest it conservatively. I don’t want to see volatility, and I don’t want to see it go down.”

This is an understandable approach. However, if the majority of your investment return needs to be earned post-retirement, you can’t afford to move away from growth assets. You still need to be exposed to the best generator of growth, which is the stock market.

The risk that matters

For Hugo, the concern is that many investors don’t do this because they are focusing on the wrong risk.

“At age 60, many investors don’t want to take on growth assets like equities that will get them inflation plus 5%,” says Hugo. “But if you invest at inflation plus 2%, you lose 11 years’ worth of income. That is the cost of investing conservatively.”

Source: Prudential Investment Managers

That doesn’t mean there isn’t a need to be prudent with your money in retirement. Particularly because a large drop in the stock market in the early stages can have a material impact on your retirement as a whole, it is worth considering separating your capital into two parts – a conservative investment that can fund your income needs over the next few years, and a more aggressive investment that can generate long-term inflation-beating returns.

If you have all your money in more stable assets like cash and bonds, however, the outlook for your capital is always going to be worse.

“I want to challenge conventional thinking,” says Hugo. “If you invest for retirement, that is a 70-year affair. And what is going to happen if you put a significant chunk of your retirement pot into cash and bonds? You are going to run out of money before you die. In my mind, that is a lot scarier than volatility.”




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“South African equities have returned 7% above inflation over the last 100 years”
What was the return in the last 5 years? How many other similar 5 year periods were during the previous 100 years?
If it would be so easy, insurance companies would be offering guaranteed inflation+5% returns, but I do not know a single one which guarantees even an inflation matching return.

Exactly! The other thing is that in those 100 years 80 of them occurred before the ANC got hold of government and the economy and they will have it for the next 100 years or until Jesus comes again whichever comes first.


Anyone can produce a progression of percentage returns from smoke, but in SA where the rubber hits the tarmac, reality bites.

Remember that fees on equity funds are more than on cash and bonds.

In short, South Africans over all are poorer than ever since independence as a result of the ANC run government. Youth unemployment is astronomical and basically a bomb waiting to explode when the seniors who are supporting them disappear.

The youth coming out of the education system are for the most part unemployable, and largely untrainable. One has to wonder where the future engineers, doctors and scientists in South Africa will be coming from given that the ANC and EFF are hellbent on getting whites out of the system and taxing them to poverty.

In terms of my own investments for retirement, I am a high income earner, but I am still concerned at the savings that I have attained until now – primarily because of the projections that I have made in terms of inflation and economic growth which tell me that my real returns will be diminishing. i.e. the money that I have at the moment will be losing buying power into the future due to low growth in South Africa (if I keep it in South Africa)

The government also has Regulation 28 that forces you to keep money in certain places i.e. can’t have more than a certain amount offshore, in equity etc. for investment schemes. Then of course they are wanting to bring in prescribed investments that force investment in parastatals and we know how well those are run into the ground.

Thankfully I don’t belong to any mandated retirement scheme through an employer. What really concerns me – and should everyone else out there – is that for the retirement savings from the first 13 years of my career that I transferred to preservation funds under the guidance of “advisors” have given NO returns over the past 9 years whereas my own investments that I did as a sideline experiment have in the same time more than doubled in value.

That tells me that in terms of investment advice, an “advisor” isn’t worth the toilet paper that I flush daily.

That should really be a concern to anyone out there taking advice from these charlatans.

They all need Retiring Financially Fit !!! Dr. Debt. Financial Fitness

For decades the quality and value of JSE stocks increased. Not so for the last decade. Good counters go elsewhere and the rest keep deteriorating. Just run through a list of the Top 40. How many counters will you buy with your own money?

This is the real risk to pensioners as local funds often have nowhere else to go.

The future looks bleak for the future retirees that are living it up currently. If you look at the cars people are driving (salaried as well as self employed) then the changes of many of them saving even 5% for retirement is practically zero, let a lone 12,5%.

maybe the plan is to die before retirement?

If the Rand depreciated over 50% in nine years during the Zuma “No administration” period then it made a lot of sense to spend your Rands before the expiry date.

Politicians will tell you to save and work hard while they spend it for you.
Spend it before the politicians do.

The biggest killer that will lead you into poverty is commuting a portion of your pension on retirement and merely spending the funds on bling or just being wasteful. You should not be allowed to commute any portion of your pension funds

For sure. It would be wise to take the R500k tax free ammount and invest it so that your pension can be reduced in the case of a living annuity. This will assist in reducing your average tax rate.

My wife and I are about to retire at 57yrs. Here’s how:
1. All our investable funds were off-shored 5 years ago through wealth managers. Despite the fees, it is worthwhile to use them
2. We sold our house and invested the proceeds in a long term fixed deposit (risk free, good return)
3. Our pension annuity will cater to approx 60% of our post-retirement needs (guaranteed not living annuity as we dont have dependents to bequeath any residue at death)
4. We’ll supplement our pension with a draw down of interest and capital from the fixed deposit over the next 10 years
5. The off shore equity investment will then have a further 10 years to grow and ride out any market volatility
6. In 10 years time we’ll move the funds out of equity into ‘cash’ and use this to continue supplementing the pension
7. This will see us through to projected age of 95
8. Assumed growth – inflation plus 3%

Fingers crossed …

PS – The invested funds were not accumulated through any systematic savings routine. Just used some common sense. Paid the house off quickly, invested bonuses, no flashy cars, clothes, etc. We may not have had what we wanted but we always had what we needed.

I trust you went into a guaranteed annuity with eyes wide open – the underlying fees recovered from the provider are normally very steep. May moving some of your funds away from an FD and buy into selected and cross segment ETF which will on the balance of things give you a return above inflation, growth and dividends. Also an FD is not near money for an emergency – just try cancelling an FD ahead of maturity date, the financial institution would rather give you a short term loan with significant costs to tide you over.
Do this before you retire and if you do have a pension don’t commute any of it, and, look at the tax implications of your decisions – there are no discounts for young pensioners

Thanks Graham. I didn’t complicate the storyline with an intended emigration in the mix. I have the FD angle covered but will take heed of the advice on tax implications

Horsetrader, unless you plan to spend 50 hours a week reading or whittling, the 60% post retirement income is way too low, take it from someone who retired early (56).
I’ve been invested and drawing pension for the last 4 years and it’s a scary place to be, very few investments have beaten inflation after fees, so
if you are getting better than 8% in a fixed deposit for the next 5-7 years and don’t need the capital take it with a smile, even after tax it will be around 6% with NO RISK!!
PS: As Graham said, don’t deplete your FD capital before the term
PPS: just make sure you split the investments between yourself and your wife to minimise Tax and look at popping R33k per year into TFSA’s

Quite right use the TFSA medium – I have moved the permissible amount annually and then bought ETF within the TFSA – way better returns than a straight FD – but still accept that you need an FD of some description as a lifeline in an emergency – I use a 32 day investment as well – no notice given

Brilliant article! Those who complain about the last 5 years do not understand the importance of long term investing. Piet

Typical broker speak. Ask the Japanese investors, who for the last 22 years , the high of the Japanese index has not being reached.

I repeat my question. If it is so easy to beat inflation, why is it that nobody offers a guaranteed inflation matching returns?

A fixed deposit beats “official inflation”… oh you want after tax, after fees inflation-beating returns? oh well then I can sell you some products (but I need my 2/20 performance return), and then you might beat inflation, or you might lose it all, but either way I need to get my fees first =)

Patrick, what are the fee assumptions pre- and post-retirement?

Great article, many thanks. For me the key issues retirees face are the following:

1. How many years income to put in income funds so that market weakness does not coincide with sale of equity assets?
2. How to transition from a reg28 environment to a new portfolio of global equities + local income.

One tactic well used to great effect is to invest a portion into a properly managed internationally diversified investment portfolio wit ha regulated, independent and offshore asset manager. A good independent IFA should be able to point you in the right direction. Does not need to be complicated or expensive!

‘few people are able to retire comfortably…’ – keep in mind that the largest employer in South Africa is the state and those employees benefit from the Govt. Employees Pension Fund which is defined benefit with very favourable terms. Using my own numbers in their calculator shows I would have a very substantially larger pension than 4% of my capital (the generally recommended draw down on a Living Annuity) or even 6.5% (the possible return on a CPI escalating life annuity @65 – this can be higher for impaired lives).
IMO the most imporant consideration is to take out the ambition to leave something out of pension capital as an inheritance – most people’s retirement funds simply can’t pay for this and a pension. Rather get a whole life policy early on if you must leave money to the kids.

I believe don’t leave your money to your children, unless there’s a special case of them having no income. Chances are that they will earn and have far more than you can leave them as an inheritance. Look after yourself (and spouse) first.

When we talk about saving for retirement, we have to consider this warning from JM Keynes:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls . . . become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished not less than the proletariat.”

This means that if you are actually successful in fighting the government for your money, you better be trained in martial arts because the “proletariat” is coming for you.

Love this. Maybe a complex description, but in fact beautiful in the context of the Taxman and the potential receivers of state benefits (your taxes).

How do you overcome the problem of inflation (hyper), that is created by government. You buy assets. In which order (property, shares etc.) Any other suggestions?

Local assets rise with inflation to a certain extent but it is not a perfect hedge. Assets in hard currency is a better hedge against inflation. Investments in shares, bonds, property, ETF’s in the USA, will offer far better protection than local alternatives during times of higher local inflation. Then there is gold of course. Gold protects your capital even against Dollar depreciation.

The IMF suggested to members that they implement “financial repression” as a tool to tackle record sovereign debt levels. This forces us to implement gearing in the process of hedging for inflation. The risk for loss of capital rises incrementally as we increase gearing. So, government action forces savers to take risks in an effort to protect themselves from socialist governments.

The problem is that countries enter a hyperinflationary spiral because that government expropriated property and assets. The fact that these factors are successful inflation hedges is also the reason why the government will expropriate it. They will point to the Gini coefficient and say that you “stole from the poor” and then they will “address your evilness” by expropriating your property in the national interest.

The bottom line is this – if live in a country with leaders to whom you won’t lend money in their personal capacity, then move your assets offshore. If you cannot trust them with a loan, you cannot trust them with any of your assets.

Patrick & Pieter Hugo,

In short, the easiest solution to this age old problem is summed up in two words.. and do it while you young.

Use leverage.

Problem solved!

If the ANC continues with their destruct and destroy ways, saving for retirement will be an afterthought to the daily battle for survival.

Am glad to say that this article DOES NOT APPLY to me (at least):

I’ve calculated that I will be able to retire approximately 5 years AFTER my death(!)

So easy to read past this is the article:
Using the same assumptions: if you retire at 60 your money has a high probability of running out at 78 – but retire at 65 and it lasts until 90.

If I may be naughty:
Another way to help your money last until the end of your earthly life is to take up smoking, drinking and fried foods. Another way is to join a bike club. 😉

That is why one should also consider a hybrid-annuity on retirement.

End of comments.





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