We are looking forward to our website updates to enhance your user experience

Aug 02, 2022

Retirement planning amidst war, pandemics, extreme weather and uncertainty

Article by Theoniel McDonald CFP®

Vice President

FIA

Post Image

We live in an era where the world literally changes daily; a world seemingly filled with war, pandemics, extreme weather events, disasters and much uncertainty. For those planning their retirement, this can cause much anxiety and doubt. I hope I can help put your mind at ease by providing some guidance on the appropriate steps I believe one should follow.


The Swedish Physician and academic, Dr Hans Rosling, in his book Factfullness illustrates how the world and the media would have us believe that things have
changed for the worse. The well-known phrase The good old days comes to mind. However, various statistics prove that much in the world is now significantly better than what it was 50 years ago. Some of these statistics include the number of people having to live on less than $1 per day, the mortality rate of children under the age of 5, births per woman, access to vaccines, literacy, and cellphone ownership – to name a few.

Dealing With The Noise

These statistics clearly illustrate how things have improved over the last few decades. The reality though is that good news stories are often less sensational and hence the reason that the media often only focus on the negative news. Gone are the days that we wait until the 7 o’clock news to find out what is going on in the world. Today we are all surrounded by the latest up-to-date news as it happens around the world.

During the Covid-19 pandemic we all became virologists and were up to date with infection rates, death rates and hospitalisation rates around the world. Now we are all following the war in Ukraine with the deepest anticipation as we realise how quickly things can escalate and spill over into the rest of the world. As this is unfolding, closer to home we are experiencing some of the worst flooding of our generation with billions of rands in damage and the loss of hundreds of lives.

All this noise undoubtedly causes much uncertainty, fear and concern when it comes to planning your retirement. Perhaps you have progressed through the financial planning phases, and you are now approaching retirement, and the thought of delving into your retirement savings is keeping you up at night. But there is some comfort to be had. Even though no one has the crystal ball that will guide us in predicting the next pandemic, the duration and extremity of the war or any other disaster that can impact your retirement capital. The only solution is to follow sound proven principles which are often not very exciting and somewhat boring but will result in your capital outliving you.

Get Professional Help

So, where do you start? Don't try to go at it alone! Increase your own knowledge base by all means, but find an experienced financial planner or wealth manager that can guide you through the process. Extensive research in behavioral psychology has shown that when it comes to our own capital we have various biases that influence our decision making. So, besides a potential lack of financial and investment knowledge, we are also at the mercy of several biases that will impact our behavior. An experienced advisor or wealth manager will not only assist you with the tax decisions, product choices or underlying asset allocations, but will also guide you with due consideration of your risk profile in stressful times when your natural reactions could be negatively influencing your investment decisions and outcomes. 
 
How Much?

Costs are important, but one cannot expect the input and guidance of a professional without paying a fair fee. The question then remains, what is fair to the advisor but reasonable in terms of the service rendered and the impact on your retirement capital? The starting point would be to understand how much you are paying, and what you can expect for that fee. Generally, you could expect to pay for the initial advice and/or retirement plan and then an ongoing fee for annual management and reviews. I would recommend that you get more than one quotation from reputable advisors or wealth managers. Ongoing costs include the platform/administration fee, investment management fee and advisor fee.


Re-think Retirement

If your retirement capital is derived from a pension, provident, preservation or a retirement annuity fund, then you would have to decide on a lump sum up to the legislated maximum. You must also consider the amount of discretionary capital you would require into retirement. Generally, this would include an emergency fund, capital to settle debt and/or capital to be invested to provide an income.

Besides the one-third limit on some retirement products, the biggest factor to consider in the lump sum is the tax to be paid on it. Often retirees opt to take the full third to have the maximum discretionary capital available. This decision could result in a significant amount of tax to be deducted from the lump sum, resulting in an erosion of capital which is virtually impossible to recoup at this stage of your investment journey. Consideration should be given to the required lump sum (considering debt, emergency funds and income) with a reasonable amount of tax to be paid on the lump sum. A good yardstick to use is the tax on the lump sum in relation to your average tax rate.

Assess Allocations

One of the biggest factors that will influence the life of your capital will be the underlying asset allocation of your portfolio. This is the next step in the puzzle and will ultimately determine how long your income will last, how volatile your capital is and how exposed you are to unforeseen local and global events. For example, if we consider the extremes, a portfolio that is 100% invested in cash will not be volatile but will have difficulty outperforming inflation over the long-term. Your biggest risk then is the likelihood that you will run out of capital. On the other extreme, if you have a portfolio that is invested 100% into equities (shares), then your portfolio will most likely significantly outperform inflation over the long term. This, however, comes with short-term volatility influenced by daily market movements.

If you are drawing an income from such a portfolio and your portfolio is exposed to a market drawdown, then your portfolio would have to sell more units in the fund to provide the same income. In this way, the capital in your portfolio could drastically be eroded. To add to the complexity, one also has to consider government and corporate bonds, property, as well as all of these assets in the offshore space.

The key therefore lies in building a portfolio consisting of a mixture of these assets to allow for sufficient capital growth, while at the same time providing a predictable income that will last your lifetime. A well-diversified portfolio will therefore not only give you income security but can provide the crucial diversification that can protect you against unpredictable changes in any one asset class, in the currency or swings in local and global markets.

Pick Your Products

The next step would be to decide on appropriate products. These could include a living annuity, life annuities, discretionary products, endowments, share portfolios etc. This choice is usually influenced by your income requirement, guarantee requirements, tax, and the liquidity of capital. Retirees often mistakenly first focus on product before giving tax and asset allocation enough thought. These days, combinations of products are often selected that allow for a blend between guaranteed products and products that are exposed to markets which allow for capital growth more than inflation.

Disaster-proofing your retirement portfolio therefore relies on the process of selecting a good advisor who will help you decide on the correct lump sum, asset allocation and products. This – combined with a mindset that ignores all the short-term noise and focuses your investment strategy over the long-term by regularly reviewing the portfolio, your income, and the underlying asset allocation – will finally give you the peace of mind that you should be entitled to during your retirement years.

advert