Sometimes ignorance creates the monster
If you haven’t seen the latest adaptation of Frankenstein, it’s worth a watch. Even if you haven’t read Mary Shelley’s novel, you probably know the story.
Victor Frankenstein becomes obsessed with what he can create. He has a vision, makes a series of questionable decisions and succeeds in bringing something to life.
The trouble is, he spends far more time thinking about whether he can do it than about what happens afterwards.
There’s probably a retirement lesson in that.
Financial products can fall into the same trap. We can become so focused on structures, features and combinations that we forget to start with the person who actually has to use the thing.
That is particularly important at retirement.
For most of your working life, the approach to managing money is fairly familiar. You earn it, spend some of it and, ideally, save some for later.
Then you retire and the equation changes. The money you spent decades accumulating now has to help pay you an income and last for as long as you need it to.
Typically, retirees have two main options to help them do this.
A life annuity provides a determined income for life, offering certainty about what you will receive. The trade-off is that the capital used to buy it generally no longer belongs to you.
A living annuity lets you retain ownership of your capital and decide how much income to draw, within prescribed limits. But the responsibility shifts too. Investment performance matters. So does how much you withdraw and how long the money needs to last.
Naturally, most people would prefer a bit of both.
The industry has responded by combining the two in different ways. In other words, we have taken existing pieces and stitched them together to solve a broader problem.
Very Frankenstein.
That doesn’t make those solutions bad but it does raise another question: do we always have to start with the products that already exist?
Perhaps the better place to start is with what retirees actually need.
They want an income they can live on. They want control over their capital. They want flexibility. And they would prefer their life savings not take a nosedive every time markets do.
Once you start drawing an income from your investment, that last point becomes particularly relevant.
While you are still saving, market dips can often be ridden out because you are not relying on the portfolio to pay your monthly expenses. In retirement, that changes. If markets fall while you are withdrawing money, you may have to sell investments at lower values to generate the same income. Which means those investments are then no longer there to benefit fully when markets recover.
So the issue is not only what kind of return a portfolio delivers over time. It is also how that return is delivered.
That is why stability matters.
Instead of asking how to add certainty to a living annuity from the outside, there is value in asking whether the portfolio inside it can be built differently in the first place.
It’s an approach we’ve taken in developing Fedgroup’s Living Annuity. Rather than looking for ways to bolt additional features onto an existing structure, we’ve focused on what sits at the heart of the investment: how the underlying portfolio can be constructed to deliver greater stability while still allowing retirees the flexibility and control they need.
No portfolio can remove market risk completely, nor should it pretend to. But thoughtful portfolio construction can reduce reliance on one market, one asset class or one source of return behaving well at exactly the right time. The aim is simple: a more stable return experience that helps retirement capital do what it was meant to do.
And stability in retirement is not just about peace of mind. It can help preserve choice.
When a portfolio isn’t constantly trying to recover from large swings, retirees have more room to make decisions about their income, spending, and the future of their capital.
With more than R900 billion invested in South African post-retirement products, that is hardly a niche concern. Perhaps the next step in retirement income does not always need another component bolted onto it.
Sometimes it is worth going back to the beginning and asking a simpler question. What does the person who has to live with this actually need?
Victor Frankenstein might have benefited from doing the same.
By Paul Counihan, MD: Wealth and Investments at Fedgroup.
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