Retirement a process, not a date

The logical and safest response to a shifting retirement landscape is to remain in the market while ensuring that your pre- and post-retirement strategy is aligned.

Historically, fund trustees, members and the retirement fund industry have planned for a defined event called retirement. But for a while now “we have been asking whether the member is best served by this line in the sand approach” says Linda Sherlock, Head of Advisory – Retail, Alexander Forbes Financial Services.

Today’s retirees face job insecurity, longevity, inflation and market risks on their income and investments, complex post-retirement product choices and high post-retirement medical aid contributions. This changed retirement landscape means that “these days retirement can happen any time from age 55 – with members choosing to retire earlier than the date set by the employer and fund” explains Sherlock.

Also, these days, many people retire only to be re-hired on a contract basis or start their own businesses. As such people “increasingly look to the fund or the trustees to help them make both pre- and post-retirement decisions” says Sherlock.

So, while traditional retirement portfolios looked to down-weight a retiree’s equity exposure at a certain time - and then continue this down-weighting strategy as the member approached ‘normal’ retirement date, today’s retirees require a more sophisticated retirement plan that:

· Starts planning for retirement at least five, though ideally ten, years before normal retirement age

· Provides sufficient education on post-retirement product options

· Implements a pre- and post-retirement strategy, allowing members to make in-fund choices correlated to their post-retirement product solutions

· Includes fund assets and personal investments capital value able to provide desired post-retirement income needs

· Can manage the larger lump sums that the October 2007 tax changes allowed retirees to take at retirement – without reducing the annuity purchase amounts that would compromise their ability to meet ongoing income needs

· Manages the temptation for retirees to reinvest their lump sum proceeds in cash investments since these are meant to be the foundation for meeting their retirement objectives. While investing lump sums in cash is good for liquidity this is a definite mistake in longer term planning for meeting retirement income objectives.

“With all these scenarios and dangers in mind it is easy to see why retirement cannot be viewed as a line in the sand” says Sherlock.

As such, the industry, including trustees and members, needs to understand that pre- and post-retirement decisions should be fully aligned. A member who intends using a living annuity structure after retirement should be planning, in his pre-retirement portfolio choice, to remain exposed to the necessary equity component that will best suite the members’ post retirement income needs.

Down-weighting and, in some instances, moving to cash entirely, reduces the members chances of growth in the years leading to retirement - meaning that at retirement the member would need to buy back into the market at new prices.

Instead, as trustees and as an industry “we must ensure that our fund solutions meet the needs of our future retirees by educating members to understand and use the various information documents, seminars and programs available to them” says Sherlock.

The aim should be to deliver a person into retirement with a fund strategy that has identified and aligned their pre- and post-retirement choices through portfolio design, education, awareness and a choice of solutions. In this way we ensure that our “members face retirement along a continuum of well-planned choices into a well-planned future” explains Sherlock.

It is ”our job to make sure that future retirees make informed decisions and plan correctly for retirement, by ourselves planning ahead through our retirement fund design and our members’ education” concludes Sherlock.