The importance of establishing pre- and post-retirement investment strategies
It’s an unfortunate reality that many South Africans will never be able to retire comfortably. What’s even sadder is that despite saving for decades, many retirees end up losing vast amounts of wealth because of badly structured investment strategies.
Cornerstone Asset Management believes that wealth management after retirement is just as important as retirement planning, yet the industry sees many financial practitioners only focussing on selling pre-retirement products and services, with very little focus on post-retirement planning. To give you a taste of the Cornerstone way, we have put together some tips to help you understand the difference between pre-retirement and post-retirement investment strategies.
- Focus on growth
When you are saving for retirement, the focus must lie in getting the most growth out of your savings and investments. To ensure that your capital is as substantial as possible at retirement, you need the highest possible returns while saving.
Depending on when you started saving, your investment strategy will be different. If your time horizon (time until retirement) is longer, you can look at more aggressive risk portfolio which yield higher returns. Here the risk is also higher, but because you have plenty of time to recover any possible losses, it may be worth taking.
On the other hand, if you only started saving for retirement later in life, you can’t afford to have unnecessary losses to your capital. Therefore, shorter time horizons usually benefit more from moderate to conservative risk portfolio’s. These have lower returns but also holds much less risk.
- How long will you live?
In 1990 there were an estimated 95 000 centenarians (individuals living to a 100) worldwide – this number had increased to 451 000 in 2015, a 375% increase in a mere 15 years. In the future, living to a 100 will be less of a novelty with most studies projecting 3.7 million centenarians worldwide by 2050.
This means that retirement funds that were meant to last 10 – 20 years in the past, will now have to sustain you for up to 40 years. Wealth managers have access to an array of predictive models to help you decide how much to save each month, but it’s highly advisable to put away additional funds during pre-retirement to have some leeway if predictions are slightly off.
Needless to say, a qualified and experienced wealth manager is vital to the health of your retirement savings. Click here to learn more about the bespoke and exclusive services of Cornerstone Asset Management.
- Focus on maintaining capital to earn a sustainable income
Now that you have hopefully saved enough for retirement and the time has come to enjoy those golden years, the continued management of your investments and withdrawals is still paramount to ensure that you have enough capital to sustain a viable income throughout the retirement period. This is done by carefully adjusting your investment portfolios to tackle inflation, changes in lifestyle and market movements accordingly.
In line with your Income Drawdown (IDD) requirements, Cornerstone Asset Management uses the following investment approach to manage your living annuity (post-retirement) investment.
Your living annuity capital will be structured into three separate investment blocks:
- 80% ofyour living annuity balance is invested into the growth portfolio
- 15% of your living annuity balance is invested into the income portfolio
- 5% of your living annuity capital balance is invested into cash
Also, your longevity will be a large determining factor when managing your post-retirement wealth. Remember, each year you get older your life expectancy increases. For example, you are more likely to reach 80 when you are 74 than when you are 34. Therefore, the continuous management of your investments as you get older is crucial to comfortable retirement.
- Capital volatility
We manage capital volatility in a similar way as we manage it in pre- retirement portfolios, through a combination of investment tools, such as diversification across asset classes and asset managers. Furthermore, we prefer a cautious to moderate investment philosophy in order to improve the risk-return profile of your portfolio. In this regard, CSAM uses IDD portfolio which invests 80% in growth portfolio, 15% income and 5% cash.
- Sequence risk
This is also an important factor to manage in an income portfolio. Sequence risk is vital in the initial stages of retirement and has a large impact on the ability of a portfolio to provide a stable income in the long run.
In order to manage the sequence risk, we actively monitor our growth assets exposure in line with market valuations (which are a decent indicator for long-term returns). When we determine that some markets are expensive (and therefore higher risk), we lower our allocation to growth assets. When we determine that some markets are cheaper (and therefore offering better value), we increase exposure to those opportunities.
The other way of managing the sequence risk is to maintain a separate cash reserve which will cater for all the short term retirement expenses (5% cash plus 15% income portfolio). CSAM will then leave the 80% exposure in risk assets to grow and will only rebalance when markets are going upwards. By using this approach, CSAM avoids a situation whereby an investor withdraws their monthly income from a growth portfolio in bear markets, which limits the amount left to grow in bull markets
- If you didn’t save quite enough
If you are in the unfortunate, yet common position of not having enough money to retire comfortably, you may have to consider more aggressive investment approaches post-retirement. This may help you to achieve high growth which will increase your capital and thereby improve your income. A qualified and experienced wealth manager will be able to assist you with strategies to best meet your needs.
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