Getting your retirement dreams back on track
By Magnus Heystek
MORE than 20 years ago I co-authored a book on retirement planning called The Truth About Retirement, together with former finance journalist Bruce Cameron.
In the book we made a number of long-range forecasts about the concept of retirement and the various strategies we thought would be appropriate considering the rapidly changing socio-economic conditions people in South Africa planning for retirement were facing at the time.
In summary, we said, that the traditional “retire at 60 and enjoy a care-free life filled with travel, free-time and endless cocktail-filled sunsets” were a thing of the past.
First, we said, saving up for 30 and perhaps 40 years in an ideal situation, would simply not be enough time to build up enough capital to finance another 20-30 years post-retirement. It didn’t matter how you juggled the numbers; this was just not possible. Very few people have the discipline to stick to a long-term saving/investment plan to save for such a long period of time.
The second factor that we considered was rising longevity. People were living longer and longer which meant they needed more capital to fund an unpredictable lifespan after formal retirement.
And finally, we said, that whole concept of “retirement” was undergoing rapid change, not only here in SA but all over the world.
Not everyone wanted to retire at 60 or even 65 and would love to be able to work for much longer, into the seventies and even eighties. And that is precisely what happened.
It is much more common to deal with people today in their mid-seventies still working, either part time or as a consultant, or still practicing full time, like myself. I am often asked about my own retirement, and I deflect answering by pointing at Gary Player still playing golf at 88, Clint Eastwood directing movies at 94 and Warren Buffet running Berkshire Hathaway at age 97.
I have many clients deep in their 70’s still practicing as doctors, lawyers and optometrists. Others have become consultants, working perhaps three days a week, or joining a business created by an entrepreneurial offspring.
Often those who are fully retired, don’t have a choice. In private they admit they would love to be doing something. You can only play golf so many days week and drink so many glasses of wine, before your liver packs up.
It’s also quite common these days for people to start a totally new career after one ends.
But in many cases people are being forced to delay their formal retirement for purely financial reasons: they simply don’t have enough money. There are many reasons for this: death, divorce, career-interruptions due to the children, gambling and many other factors.
These are all well-known and often discussed in the financial media.
Poor investment returns
But the one issue that is often ignored, is the poor investment returns on traditional retirement planning products, particularly equity linked investment products and also property.
These investments have for decades been the major building blocks for people building a decent retirement, either separately or often in a combination of the two.
Historically, the real returns – i.e. AFTER INFLATION – of these two asset classes were about 4-6% per annum, which, compounded over time, built op substantial nest eggs to be used as retirement capital.
Since the Great Financial Crisis (GFC) in 2008, this seems to have changed, in the case of residential property, dramatically so. The residential property market in SA has been in what is known as a bear market ever since May 2008, according to statistics produced by FNB in its regular property barometer. It’s been an abnormally long-bear market during which time the inflation adjusted value of residential property prices in most areas of SA, except the Western Cape and a few other areas, have declined dramatically. According to my rudimentary calculations I would say property prices have lost about 30-40% of its value when compared to inflation.
This has been a body blow for many middle-class home-owners who saw the sale of their large property—prior to downscaling to something smaller—as one of the building blocks of their retirement.
In many parts of the country, especially smaller and even medium sized towns such as Kimberley and Bloemfontein, has a fully functioning residential property market almost come to a standstill. Everyone is selling but no-one is buying.
I often joke that you know it’s the end of a town when Pam Golding moves out and a Finbond moves in.
Property research group Lightstone recently commented that anyone in SA—except the Western Cape—who has bought residential property during the last ten years or so, is probably selling at a loss in nominal terms today. Just imagine that! Inflation is up 50-70% over the same time, but a major asset in your portfolio—often the biggest for some—has LOST value.
Ouch, that hurts.
Johannesburg Stock Exchange
The second body blow has been the weak performance of the Johannesburg Stock Exchange (JSE) since about 2013, when it started under-performing world markets and more recently even emerging markets. The massive investment industry has shied away from spelling out the consequences of this under-performance, but it is not uncommon for investors nowadays to complain that some of their long-term equity investments have not produced real growth over time.
I recently tweeted about two major local investment brand names that produced returns of just over 4% per annum over 10 years. Inflation averaged 6% over that period, which again translates into a loss of purchasing power.
The average return of the main building blocks of retirement funds in SA—called the multi-asset medium equity-category—has shown a real return of barely 1% per annum over the past 10 years, before investment and advice fees are taken into consideration.
In all: very few people saving for retirement have enjoyed inflation-beating growth over the past 10 years. Yes, if you’ve invested all your equity investments in offshore funds and bought property in one of the few areas where this asset class has performed, 10 years ago, you probably would be fine, But for the rest, its white knuckle time, especially if you have no choice about retirement.
Fortunately, I think the worst is over for the JSE and that investors can look forward to better inflation adjusted returns going forward. It all depends, though, on the success of the Government of National Unit (GNU). I am already seeing better returns from the listed property sector on the JSE starting to come through (12% per annum over the past three years), but that is coming off a five-year period of zero growth. Other sectors of the JSE, such as banks and financials, are starting to attract some offshore attention.
If the GNU falls apart, for whatever reason, then my optimistic view will change.
I know its early days, but the GNU could well be the spark that turns our investment fortunes around and provide some stability to our national finances. Here’s hoping.
Click here to find out more about Brenthurst Wealth
*Magnus Heystek is a director and investment strategist at Brenthurst Wealth. Follow him at @MagnusHeystek on X.
Comments