How much equity exposure do you need just before retirement?

Reader’s questions answered.

CAPE TOWN In this advice column Braam Fouché from PSG Wealth answers a question from a reader who is thinking of changing his pension fund allocation.

Q: I am 57 years old, and plan to retire at 63. Currently the bulk of my retirement funding of R5 million is in the conservative option of my pension fund, which has a 35% equity exposure.

I only recently started allocating my monthly contributions to the growth fund, which has a 50% equity exposure.

Should I move everything or at least a bigger portion from the conservative to the growth fund? I have one free switch per year.

Even at 50% equity exposure it seems rather conservative as I’ve read experts advise that one should have 65% to 75% equity exposure. Is the window of a maximum six years too short a time to make up for what I have missed out on?

The questions you ask are very appropriate as you have now entered the home strecth towards retirement and it has become crucial to determine whether you are on track to reach your required goals.

In order to understand how you should invest, you need to bear in mind that the main objective of retirement investments is to acquire enough capital to fund your retirement needs. You therefore first need to determine how much you will need and whether you are on track to get there.

The best place to start would be to meet with a financial planning professional who can conduct an in-depth financial review of your affairs. If this indicates a likely shortfall at retirement, then you need to look at alternatives such as making additional savings, extending your retirement date and assessing your investment allocation.

Historically it was believed that younger investors that have many years to save towards retirement should maintain high exposure to growth assets such as equity and property, and that investors closing in on retirement should consider reducing risk to blend the protection of their accumulated capital with inflation beating returns.

However the protracted period of low interest rates has created a dilemma for older investors, and even the lesser-informed are now required to maintain higher exposure to equity to beat inflation into retirement.

Another factor is the retirement industry’s move towards defined contribution funds. This has required employees to become educated and personally involved in managing their own capital.

Portfolio allocations were previously dealt with by the product providers within their own portfolios and the public had little insight into the manner in which returns were generated. This risk has been shifted to the public and you need to equip yourself with knowledge to be able to make informed decisions regarding the ongoing investment of your capital.

The low interest rate environment mostly affects retired investors who require more capital than they did in the past to generate the same income. We have seen acceptable income withdrawal rates reduce from 10% p.a. to 4% p.a.

The table below illustrates the effect of interest rate cuts on the income one can expect to earn in retirement.

Interest Rate

Gross monthly income from R1 million



R8 333



R6 666



R4 166

Current high level


R3 333

Current medium level

Note that the current withdrawal rates above also allow for making adjustments for inflation, which is essential to ensure the long term sustainability of your income.

It is necessary that you consider the possible outcomes, both positive and negative, of the different investment strategies you are considering. High equity exposure gives the opportunity of superior returns, whilst low equity exposure offers a higher degree of stability. On the flip side, high equity will mean higher volatility whilst low equity may not present adequate inflation-beating qualities.

The period of investment is an important factor as equity out-performance is generated over long periods of time, and volatility is also reduced the longer you stay invested. You have indicated that you have about six years left towards retirement, which is still a long enough period to increase equity exposure and weather the impact of any volatility that accompanies this decision.

Bear in mind that the period of investment is extended even further after retirement. If you choose to retain control over your capital by investing in a living annuity you could also increase your exposure to equities substantially as your investment term becomes much longer.

Your current portfolio can be described as a low equity moderate structure, which could generate returns of inflation plus 3-4% p.a. Increasing the equity exposure up to 75% could increase the possible returns to inflation plus 5-6% p.a.

If we estimate inflation at 6% p.a. and we exclude the impact of fees and the future contributions you would make, the following returns could be generated over the six year investment period:

Initial Capital

Equity exposure

Estimated average return

Retirement capital

R5 000 000


CPI + 3% per annum

R8 385 500

R5 000 000


CPI + 4% per annum

R8 857 805

R5 000 000


CPI + 5% per annum

R9 352 073

In other words, increasing your equity exposure to 75% could potentially give you an extra R1 million at retirement. That would roughly translate into an additional income of R3 000 to R4 000 per month at current interest rate levels. This is certainly not guaranteed, however, as the recent bout of increased volatility in global markets, along with the dim outlook for the SA economy have reminded investors that there is downside risk when investing in equities.

Bear in mind that the last decade’s returns were supported by the commodity super cycle along with massive central bank intervention in global markets, and are unlikely to be repeated. You should therefore seek the input of an informed specialist who would be able to assist you in making decisions about how to invest in this challenging environment.

A qualified financial planner will discuss and assess your requirements and the potential impacts of your investment decisions. It is crucial that you obtain this advice sooner rather than later in order to implement a structured plan aimed at preparing you for your retirement, reviewing your progress and making unemotional adjustments. Forging this relationship now will also ensure that you are better equipped to navigate through this transition into the post-retirement period and thereafter.

Braam Fouché is the director of PSG Wealth’s office in Umhlanga.

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“If we estimate inflation at 6% p.a. and we exclude the impact of fees and the future contributions you would make, the following returns could be generated…”

Guessing future inflation, excluding fees, not knowing what the equity market will do over the next few years- and you are basing somebodies retirement income on this? These factors have such a massive impact, you cannot possibly build a model based on this flimsy information? These numbers are a complete thumb suck.

Also, what is this “estimated average return” financial advisors use? Those folks who retired in 2008/2009 after markets got smashed will tell you where to shove your estimates.

I was on the “High Yield” with the Transnet Pension Fund. When I gave notice for early retirement, the funds were moved to Money Market fund. This cost me 2.5% of my portfolio, without option to not move the funds. At 65 my investment horizon is 15-20 years. My investment adviser has a small office and for the past 15 years have only given good advice.
I get with an well known firm R5500 per million per month, and still have capital growth of R1000 per million.
Fortunately no thumb-sucking estimates. Hard figures.
I lost 10% in 2009, retired 2010.

I agree with WolliWolta, concerning the fact that there are so many uncertainties…

Especially for someone who is planning to retire in 6 years time. Rather stick with what you have. The risk of switching your retirement fund to 75% equity exposure for an estimated return of R3000 extra income a month is just not worth it!

now if you were planning to retire in lets say 15 years time, that would have been a different story… yet unfortunately I find this article full of “ideal-world-scenarios”

Do not for a moment believe that inflation runs at 6% p.a. Have you measured your inflation recently? I do and mine exceeds 11% and I will not be able to draw down more than 4% before tax, that equates to R40K / R1M or a mere R 3 330 p.m. / R1M. So to get my R40K per month pension I am going to need at least R12M + 20% factor of safety = R14.4M. Working on it so I am 95% invested in equities at age 62. God willing I’ll make it.

End of comments.




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