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Junk status and your retirement fund savings: What steps should you be taking really?

22 May 2017Malusi Ndlovu, Old Mutual
Malusi Ndlovu, Head of Old Mutual Corporate Consultants.

Malusi Ndlovu, Head of Old Mutual Corporate Consultants.

By now, almost every South African will be aware that two of the major international credit ratings agencies have downgraded South Africa, but many may be unsure about what to do with their investments, especially those in retirement funds where the investment decisions may be out of their hands.

According to Malusi Ndlovu, Head of Old Mutual Corporate Consultants, reactions to such economic events are often more important than the events themselves.

“It’s difficult to predict precisely what the impact will be. While it may take a while for markets to settle and for investors to figure out how this alters the economic and political landscape, considerable market and currency volatility can be expected for some time, but members should not panic and make any rash decisions based on the current market events, such as quitting their job to withdraw their retirement savings or abruptly changing investment strategy.”

Old Mutual Corporate Consultants stresses that the tried-and-tested investment rules apply more than ever before:

Keep focused on your objectives, which for most retirement fund members should be to achieve long term returns in excess of inflation. Importantly, preserve your retirement savings if you change jobs, as spending this money now will mean you lose out on the increasing positive impact that compound interest has on savings over time.

Take advantage of tax breaks by contributing more to retirement funds and tax free savings. Contributions to retirement vehicles are tax deductible, subject to certain limits, and you’ll pay zero tax on income, dividends and capital gains. The recent increase in income tax announced at the 2017 budget speech provides additional reasons to reduce your effective tax rate and if taxes need to rise further in future, then growth on your savings will be protected from these taxes.

• Retirement fund members typically save a monthly amount from their salary. These monthly contributions automatically introduce rand cost averaging. This means that new contributions made after a fall in markets will be invested at lower prices so they have a better prospect of above average returns in the future as they will participate in any market recovery that happens. In this way, volatility can work in your favour.

Lower your expectations in relation to the returns you might get from your investment. Beware of switching funds because returns look poor, as switching often has costs attached and can be detrimental, especially if the reason for the perceived “underperformance” is just the market and has nothing to do with the skill of the asset manager.

• It’s also important to manage your overall finances conservatively in this environment. Reduce debt, add to savings, don’t overspend, and have a ‘buffer’ in a savings account for unforeseen expenses.

Beware of scams. During tough times, scams become more prevalent as people become more desperate – both the victims and the perpetrators. Do research before investing and stick to well-known, reputable, quality providers before investing. Don’t be tempted by promises of unbelievable returns – they’re normally not believable!

• For those close to retirement, you may want to think about delaying it if possible as future returns might be lower and you’ll be thankful for the extra savings and shorter time living off your savings.

• For those already in retirement, don’t draw too much from a living annuity – try to withdraw a manageable percentage each year. A sustainable percentage drawdown depends on a pensioner’s age but should be around 4% for someone newly retired at age 65. Drawing less now will increase financial resilience to withstand tougher times and possible lower returns.

• Incomes might come under pressure, jobs might become scarcer and interest rates are likely to remain higher, thereby placing pressure on households sobuilding financial resilience through sensible and conservative management of finances will be important.

• For those also saving outside of their retirement fund, it is important to stick to your plan – now is not the time to panic and sell.

• If you don’t already have a clear plan and are in any doubt, seek financial advice from an accredited adviser and remain committed to a sound financial plan.

Quick Polls

QUESTION

Health Minister Aaron Motsoaledi has said that the NHI will bring about change in the industry which will see medical schemes a slim picture of their former selves. Do you think this is the right approach to be taken?

ANSWER

No, medical schemes offer invaluable coverage in a market that is being ravaged by high costs.
Yes, universal healthcare will benefit the country in the long run.
Just wait, the minister will soon find out that a medical industry without medical schemes is no industry at all.
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