Magnus Heystek, Investment strategist, Brenthurst Wealth
I cannot count the number of articles, webinars and seminars I’ve read/watched or attended over many years in the financial services industry where people planning for retirement have been blamed for being responsible for their lack of retirement capital when they actually decide to retire.
All the usual suspects are trotted out and polished anew – starting too late, withdrawing capital early from retirement funds to buy consumables, being too conservative etc.
And mostly they have been right – poor investment behaviour from savers/retirees has played a major part in the capital shortfall experienced at the time of retirement.
Hell, I’ve actually written two books on this subject over the years (How to Plan for Happy Retirement (1994) and The Amazing and Scary Truth about Retirement, co-authored with Bruce Cameron in 2002).
The outlook for potential retirees has not improved over these years and instead has even become worse due to the ever-worsening financial situation in South Africa.
But what happens if you were doing everything 100% by the book saving 15-18% of your annual income into a retirement fund, topping up your tax-free contributions year after year to the maximum and even buying a residential property or two as an added building block in your retirement portfolio for when the time comes to hang your boots and look forward to a care-free retirement like many wonderful adverts have been promising you all these years.
Why is it that even your perfectly planned retirement is currently crashing around your ears, at precisely the time you are approaching that magical age of 60, 63 or 65, whatever that lucky number might be?
Traditional asset classes failing you
Quite simply – the traditional asset classes – equity and property (both commercial and residential) have all underperformed greatly over the past 5 to 20 years. In the case of property, it has been a full-blown value collapse.
But try and find any half-decent analysis of these trends in the mainstream media by our traditional asset managers and funders of property ownership (banks) and you will struggle to find it.
Any article about the retirement dream crashing simply avoids the elephant in the room: SA-based equities and properties are in full freefall (collapse) which, together with the collapse in the currency over the past 5 years plus no or very slow economic growth, simply is putting the achievement of a sizeable amount of capital amount for retirement out of reach for most, even the almost rich.
Only the very rich or those who externalized most of their investments over the past 10 years or more have seen the size of their nest egg grow. For the rest – still clinging to the “local is lekker”-mantra, retirement is going to be a terrible, cash-strapped experience.
For years purveyors of the “retirement dream” have put up 10-12 times your annual salary in the final year of your working life as a realistic target to aim for.
I find very few people retiring today, even those having done the right thing over many years, even close to that target. And they simply can’t understand why their income in retirement is going to show an immediate drop of 30-40% (when compared to their final salary at the point of retirement).
There are two reasons for this:
- Investment returns of SA retirement funds, after costs and fees, have not beaten inflation over the past ten years. In most cases, savers/retirees are simply getting their money back when inflation is taken into account. I have found many retirement funds that actually returned your money back in nominal terms over the past 10 years, such has been the poor performance of SA retirement funds. And this includes retirement, pension, provident, preservation and retirement annuity funds.
Instead of highlighting this, many fund managers and commentators use acres and acres of media space to discuss how “cheap and undervalued the JSE” is, implying that anyone not staying the course will, no doubt, lose big time when the eventual upturn comes.
Over the past few weeks, I have read several such articles again. The few fund managers that disagree—and there are some, such as Gryphon, mostly don’t get airtime from the mainstream and even specialized financial media.
Believe me, I’ve looked—it simply doesn’t exist. There are many reasons why I disagree with such bullish views—which use historical valuation comparisons to justify these claims.
The main one is that the macro-environment of the SA economy and the companies that operate in it has been damaged, perhaps irreparably by years of ANC malfunction, corruption and ineptitude.
Bullish analysts simply ignore this or wish it away. In short: the JSE of today is not the JSE of 15-20 years ago.
- Another reason for the under-performance—and I’ve written many articles over many years on several websites—was Regulation 28 which limited the amount of foreign assets fund managers could include in their asset allocation models.
The JSE has been one of the worst-performing stock markets in the world in the period 2010 to date, yet pension funds were given very limited leeway to search for greater offshore exposure via pension funds, even though the maximum limits were slowly and grudgingly lifted from 20% to its current 45%. Even at this level, it is not enough in my view.
For a while, investors in Retirement Annuities and Preservation funds were allowed 100% offshore exposure, but this was stopped in 2011 when the new Reg28 regulations were introduced.
Those smart enough to keep their funds offshore have seen their returns at double and more compared to funds under the restriction of Reg 28 since then.
The below graph shows clearly how retirement funds in the Multi-Assets (high equity) and Multi-Assets (medium-equity) have performed over the past 10 years versus inflation.
I’ve used inflation plus 3% as a yardstick as the investment returns in the table do not take into consideration advice fees and/or platform fees, which are not included in the net return calculations of the retirement funds.
Fund managers like to use the expression “cash is trash” but over 10 years even a stock standard high-income fund has beaten most retirement funds in SA.
Retirement funds not keeping pace with inflation
The average annual rate of return on a global offshore fund has been more than double that of the return on local retirement funds.
It’s a good thing (for fund managers and trustees of pension funds) that most members of retirement funds are not financially literate are have difficulty understanding the difference between real and nominal returns.
But they will feel the impact years down the line during their retirement when the purchasing power of their money at the check-out till is brutally exposed.
This ever-increasing poor performance has been (and still is) the major reason why I recommend that people cash out their RA’s the minute they hit 55 when the rules allow them to do so. This can be expanded on in greater detail in a future article but in short, here are the reasons:
- Even with a 45% maximum offshore exposure now allowable in terms of Reg 28, I do not think the investment performance of the Reg 28-restricted funds will compare well with offshore options. So, get your one-third out soonest, cash out the tax-free portion up to R550 000 and transfer the balance into a living annuity where you have no limits as to investment allocations, even 100% should you so wish. This is particularly relevant in light of the vast number of South Africans emigrating or thinking of emigrating. Obviously, this kind of advice doesn’t sit well with large insurers and asset managers as this could possibly mean a loss of business, but I think it is in the best interest of investors.
- The tax-free portion coming out of RA’s and or preservation funds can be used to reduce expensive debt, or release capital to start an offshore investment portfolio far away from the restrictions of Reg 28 or any other future restriction. Chances are very good that this money will be invested with non-SA companies, hence the resistance to condone such a recommendation.
- The second part of the collapsing retirement dream has been (and still is) the collapse of residential and commercial property. Again, this is an area where the commentators fear to tread. There is an almost deathly silence about the collapse of property values in SA, both commercial and up-market residential properties. It’s much worse than people think. They only realize it when the time comes to sell—the so-called downsizing at retirement—to find a smaller property in the Cape is much more expensive than a large home in other parts of the country. Have a look at the below graph from the latest FNB Barometer, published last week. It shows the decline of property prices in real terms from the cheapest housing (on the left) to the more expensive housing on the right. In short: the more expensive the property the bigger the crash has been.
- The most recent FNB barometer has a tiny graph tucked away in one corner which shows just how bad the state of the residential market has been, especially in the so-called top end of the market. Average prices have dropped by between 10 and 20% in real terms, despite the fact that prices in the Western Cape have gone up during this period. Strip out the prices in the western cape and average residential prices in the R2m and higher mark have declined in real terms by between 10-30%.
In short: the residential property market is currently experiencing a bloodbath as emigration, downscaling and relocating to the Cape have created a perfect storm.
The loss of retirement capital must run into hundreds of billions of rand, but there is not a lot of discussion about this.
The same has happened to commercial property in SA. Commercial property has been a zero-growth investment for 10 years now, After inflation the real value of commercial property is down by between 30-50% and in some cases of well-known shopping centers, down 90%.
The below chart shows the performance of the listed commercial property index versus a global property fund, which can be bought in SA with no problems.
The SA property index—even with some offshore properties in there—underperformed global markets by about 60% over 5 years and 35% against inflation.
That is real poverty, dear readers, for the owners of those buildings, shopping centres and warehouses dotted across the country. Again, this collapse is rarely reported and is a major factor in pulling down retirement capital investment returns.
Collapse of listed property
But do you read articles or listen to debates on this issue? Not on your life. It’s like it simply doesn’t exist, but it does dear reader, it does. It’s your money after all.
Combine these two trends and you can see how large the capital shortage is for many former upper-middle-class people in SA whose retirement plans have been shattered.
The care-free retirement promises of years gone by are long gone, even well-off savers now realize that the retirement game is not care-free and needs ongoing management for many years to come. And most of the future investment focus should be offshore.