Retirement saving in a volatile investment environment

Danie van Zyl, Head of Guaranteed Investments of Sanlam Employee Benefits.

Whether it is your first day of employment or the last month of your working career, deciding on the best investment options for your retirement savings can be a daunting task, even for financially astute investors. Many retirement fund members find the range of choice intimidating.

Add to this the recent volatility of international investment markets, brought on by social and economic uncertainty, the Brexit vote, the outcome of the recent US elections and closer to home; the Gordhan saga, leaving many investors grappling for answers when it comes to securing returns on their long-term savings.

“When it comes to retirement savings, the old adage of “it is time in the market rather than timing the market” holds true, says Danie van Zyl, Head of Guaranteed Investments of Sanlam Employee Benefits. “From a retirement savings perspective, the best option is to think long-term and plan and preserve for one’s retirement – thoughtfully and systematically.”

A lifestage investment strategy provides a simple yet effective roadmap towards securing a better retirement outcome. “Lifestage investment portfolios have found favour with retirement funds over the past few years, delivering competitive results and while ensuring that members address the right risk at the right time on their journey to retirement.” says Van Zyl.

Many young members pay too much attention to market volatility, as long as you have a 30 plus year time horizon, market conditions now becomes irrelevant. “I would argue that for these younger members, earning an insufficient return over the long-term is a bigger risk than market volatility” says Van Zyl. This entails investing more aggressively at younger ages.

Volatility is only a concern when you are either going to buy or sell an asset over the short-term. But this is exactly what you are doing when you are retiring and opting for a guaranteed annuity; you are selling your retirement fund savings and buying an annuity. Therefore as you grow older, the need to protect and preserve your pensionable savings becomes more important. Investing in more stable, inflation linked investments now seem the wiser option, which is exactly what lifestage investing does. A lifestage strategy provides members with the opportunity to invest in a single investment strategy appropriate for the whole of their savings careers. The portfolio de-risks automatically as individual members grow closer to retirement.

According to the research results in from Sanlam’s 2016 BENCHMARK Survey, just over 60% of stand-alone funds and 52% of umbrella funds have incorporated a lifestage model in their investment strategies. For a lifestage model to be successful, however, aligning the investment strategy prior to retirement and a member’s final annuity choice is critical. Preserving the value of a members’ investment just before retirement should be carefully considered, not only when it comes to capital protection, but also to ensure that the investment keeps pace with inflation, thereby securing the required retirement income.
Most funds offer one of the following three default annuity options which can be linked directly to a life stage model:

• Inflation-linked annuity: This provides pensioners with an income for life that is guaranteed to increase with inflation every year. The cost of the annuity decreases or increases as real interest rates move up and down.
• With-profit annuity: A with-profit annuity provides pensioners with a guaranteed income for life, with increases declared annually by an insurance company. Increases depend on the portfolio’s underlying investment return, how long pensioners are living and the insurer’s smoothing philosophy.
• Living annuity: A living annuity gives pensioners great flexibility in how to invest their retirement savings and on how much of these savings they want to withdraw annually in the form of a pension. However, these annuities do not provide members with a guaranteed income for life, while poor investment returns can lead to a lower income later in life.

A smoothed bonus portfolio an all-round option prior to retirement:

Van Zyl maintains that a good all-round option to preserve capital investment, particularly in a protracted volatile investment climate would be to consider investing in a smoothed bonus portfolio prior to retirement. Smoothing of investment returns provides a more stable and predictable return profile, thereby reducing the risks attached to investing in or disinvesting from the market at the wrong time.

A smoothed bonus portfolio evens out the ‘bumps’ and “pot-holes” in investment returns and provides stable, non-negative bonuses to members. This is especially important if you are close to retirement; you have worked hard for many years to build up your fund value and do not want to risk seeing your savings reduce due to a market downturn just before you retire.

Given the complexity of investment markets - reading the market is often best left to those in the know. Van Zyl adds that “members should be encouraged to seek appropriate financial advice earlier rather than later when it comes to retirement planning. Obtaining regular guidance from their financial adviser; their fund administrators and fund trustees throughout their working careers will stand members in good stead to achieve a secure outcome for retirement.”