How interest rates affect South African retirement funds

Old Mutual Personal Finance head of advice Lizl Budhram said interest rates could have a significant impact on South Africans’ retirement savings but this impact is largely determined by every individual’s unique situations.

She told Newzroom Afrika that the impact on each individual’s retirement plan will depend entirely on where they are in terms of the time frame to retirement. 

“If we look at people far from retirement, it’s less likely to have a significant impact because those people will still have time to work through several interest rate and market cycles before they arrive at retirement,” she explained. 

“If your retirement time frame is shorter, let’s say you are within the last ten years before your retirement date, the impact will be bigger.”

She said markets and interest rates are cyclical, and people with a longer time frame to retirement must, therefore, not make short-term decisions based on where they are in the current cycle. 

This is because the cycle is likely to change a number of times, and these people can afford not to respond to the current cycle if they have properly diversified asset classes in their portfolio that will take advantage of high interest rates and long-term equity cycles.

“If you’ve got a reasonable period to go until retirement, it’s important to take enough risk to ensure you benefit from equity cycles and not just take the safe route and sit in interest-bearing investments where you get great interest rates right now, but it may not serve you in the long run in terms of optimizing your returns on your retirement investments,” she said.

“Leave your money alone, let it accumulate. You know you have the power of compound growth; it will often make an enormous difference if you can just leave the money alone and almost forget about it.” 

She also emphasised the importance of ensuring a portfolio is properly diversified “because then you don’t constantly have to watch and switch and time the market and guess which asset class is going to give you the best return”. 

She explained that lower interest rates will affect retirement savings by allowing investors to benefit from better equity growth, resulting in better accumulation and growth in retirement funds.

“It’s very important to take care to make sure that you manage that impact and you choose your asset classes carefully so that it isn’t a profoundly negative impact on your retirement value when you arrive at retirement,” she said.

For people who are closer to retirement or already retired, she suggested speaking to a financial advisor to ensure they have the right asset classes that will allow them to benefit from and not be negatively impacted by interest rates.

“We should also not forget about the people who are already in retirement because you have an accumulation phase where you plan for retirement,” she said. 

“But once you arrive at retirement, you also need to make sure that what you have accumulated is going to last for the rest of your life to give you an income.” 

She said it is important to take into account where the interest rate cycle is and to ensure these people choose the right asset classes to provide them with a sustainable income.