South Africans saving for retirement must rethink their investment strategies to prepare for potentially longer retirements and how their priorities change over time.
Longer lifespans would result in more years of healthcare expenses and, thus, financial support in retirement.
Saving for retirement is fundamentally a long-term financial strategy, and success hinges on generating real returns over time.
Daily Investor reached out to investment specialists to understand how South Africans should change their investment strategies as they near retirement and how they should invest during retirement.
Financial planning coach at Old Mutual Wealth, Sharon Moller, said that as you approach retirement, reducing risk and preserving capital is generally advisable.
Some general investment principles, such as diversification, are just as important as pre-retirement.
Diversification helps protect your investments during market downturns and allows you to shift your investment focus away from appreciation to income generation.
Another important principle is discipline. Managing your drawdown according to your income needs is paramount, Moller said.
Investors should not take more than they need when markets have delivered higher than required returns.
Market volatility means there will be times when your portfolio will give you less than what you require in returns, and it is important to prepare for those periods.
Moller advised investors to consider incorporating annuities into their retirement plans as they provide a guaranteed income stream for life, offering a level of financial security in retirement.
However, she cautioned that living annuities or life annuity structures are restricted in the income they can provide over a given period. Retirees must factor this in before entering an annuity.
Paul Hutchinson from Ninety One urged investors to remember that retirees have different needs and face different risks over time. The common risk is running out of money as you live longer than expected.
Ninety One previously completed an in-depth study into how investors should approach their retirement income provision.
The study emphasised that choosing the right starting income level is key to investors managing their risk of running out of money.
In short, a retiree should elect a starting income level of no more than 5% of their retirement capital. This is the amount they will draw down from their investments in retirement.
With this starting income level of 5% of retirement capital as your standard, Hutchinson said you require a capital lump sum equal to 20 times your final salary to invest in an income-producing annuity on retirement.
This is the amount required to generate an income equal to 100% of your final salary post-retirement.
Drawing no more than 5% is considered likely to provide you with an inflation-adjusted income for 30 years, ensuring a comfortable retirement.
Any capital lump sum of less than 20 times will result in a lower starting income than your final salary, and therefore, you would need to reduce your monthly expenditure accordingly.