You often hear stories of retirees in South Africa who battle to juggle their finances as medical expenses and day-to day living keep on increasing without access to extra funds. Add this to people who regard themselves ripe for retirement, but simply can’t afford to. As Alec Hogg pointed out in our morning meeting; retirement was invented by Otto von Bismarck in 1881 and it was given to soldiers as a reward for risking their lives for the handful of years they were expected to last after their time on the battlefields. We now live much longer after retirement so there probably needs to be a redefinition of retirement as we humans are stretching our years on earth with the average lifespan testing the limits, but that is another debate. PSG Wealth’s Schalk Louw believes with careful management of retirees’ personal investment linked living annuities, retirees could be given a fighting chance. – Linda van Tilburg
Schalk Louw was talking to his mother who told him that growing old was not easy with increasing costs placing a heavy strain on retirement income. He says he has come across other South Africans who have had to sell their homes and move in with their children, because rising costs were outstripping their income. The mistake most people make, he says, is when things get tougher, they push up their income from their personal investment linked living annuities (ILLA). In the shorter term the effect may not seem that detrimental, but in the longer term the effect will seriously impact on your income.
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Looking at the effect of pushing up the annual withdrawal rate to 10%; Louw says you will be able to maintain your income for six years after that, but after the six years your income will effectively start to decrease. Contrast that to a withdrawal of 5% and the period of the sustained income will increase from 6 years to 23 Years. These figures are based on guidelines by the Association for Saving and Investment SA (ASISA) on how long clients can expect to draw real income from their annuities at different drawdown rates and given different returns. They have been expanded by PSG Wealth.
Louw says the harsh reality of this, is that people would have to become more frugal. He says he is told by clients that they can’t cut costs. If they don’t manage cuts, the other alternatives are to increase risk which could get better returns and look at incremental, small cuts to the withdrawal rates which would push out incomes. It could increase sustainability substantially.
He says the harsh reality is unless you are forced into retirement because of medical or work reasons; you are probably not ready for retirement if you need to withdraw 10% annually from your ILLA. Louw suggests to people considering an increase in the withdrawal rate in the current climate of low or no growth, to rather concentrate on tweaking budgets. He says he has the same conversation in his house, where his wife tells him they can’t possibly make any more cuts and they do find ways of adjusting their budget.
Louw describes global investments as a fantastic environment that has been the saving grace in a properly diversified portfolio in the last years, but is also of the opinion that you should not only focus on investments offshore; it should be diversified as it is the best defence against market fluctuations.
He says when you look at the bigger picture; it is clear that the investor who chose the average SA Multi Asset High Equity Fund above the Global Multi Asset High Equity Fund, the South African fund would have performed much better over the longer term. And those who decided to take even less risk and invest in the average SA Multi Asset Low Equity Fund, would have enjoyed the same perks as the global fund investors, only with a lot less stress.
Louw says offshore wind was the saving grace over the last 15 years; this may change, but it still all comes down to maintaining a lower withdrawal rate, which he found to be optimum between 5% and 6%.
