Planning strategies to consider in retirement - September 2019
The typical retiree who draws an income from a living annuity needs to plan for 25 – 30 years and can expect moderate inflation and an improved return outlook (which we discuss in more detail below). The prudent planner’s response to this backdrop however remains one of:
- moderating income drawdown rates;
- ensuring that post-retirement portfolios have the appropriate balance between income and growth assets; and
- considering the introduction of dynamic spending rules to aid the sustainability of a retirement income plan.
The reality is that most South Africans do not plan sufficiently for retirement and leave saving for it too late. There are however ways to make what they have managed to save last a little longer.
- One option is to delay their retirement date by five years if at all possible. By continuing to earn an income and not drawing from your retirement savings, an investor can retire with 60% more capital assuming a 10% return p.a. which is aligned with a reasonable expected rate of return on assets.
- Another option is to supplement their post-retirement income by way of part-time work or starting a microbusiness. A post-retirement career of their choice has the added benefit of helping investors stay engaged and achieving greater personal fulfilment.
REASONS TO FEEL A LITTLE MORE OPTIMISTIC
While Capital Plus and Balanced Defensive currently have below-maximum exposure to risk assets and offshore assets, we are optimistic about the return outlook for our fixed-interest exposure. Both portfolios continue to hold a substantial weighting in South African bonds, both fixed rate and inflation linkers. The high real yield (currently around 8.8%) – thanks to well-contained inflation – is very attractive and provides a solid risk-adjusted building block towards achieving the portfolios’ targeted return of inflation plus 4% (Capital Plus) and inflation plus 3% (Balanced Defensive).
FIGURE 4 - 10 YEAR FORECASTS FOR LOCAL AND OFFSHORE ASSET CLASSES
Further, we don’t believe that the funds’ current rolling 12-month returns are reflective of calendar year 2019 so far. In the event that both funds only deliver cash-type returns (of 7.5% p.a.) for the remainder of the year, we expect rolling 12-month returns to be in the low single digits (refer to Figure 5 and 6). In the event that the funds deliver no return for the remainder of the year, we still expect much-improved rolling 12-month returns by the end of this year
CURRENT 12-MONTH FIGURES NOT YET REFLECTIVE OF 2019 SO FAR
FIGURE 5 - CORONATION BALANCED DEFENSIVE
FIGURE 6 - CORONATION CAPITAL PLUS
SPENDING RULES FOR CAPITAL PRESERVATION