Magnus Heystek: The retirement crisis is upon us

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By Magnus Heystek *

If there is mounting talk about a “retirement crisis” in the United States, the largest economy in the world and one of the richest, then how bad is the retirement crisis in South Africa?

It’s much worse than most commentators would like to admit.

The putrid performance of the two main asset classes ordinary people use to build up retirement capital – pension funds and residential property – have all but shattered the so-called “retirement dream” for almost all but one or two percent of the population.

Even so-called “wealthy investors” are finding retirement a brutal squeeze between the weak performance of local assets and a rapidly rising cost of living.

Let’s look at the returns of retirement funds over the past 10 years or so.

A quick analysis of the returns of the 3 large life assurance companies – Old Mutual, Liberty and Sanlam – shows a very worrying trend over ten years and more. Very few retirement portfolios have done better than 6-7% per annum, which meant no REAL growth in retirement capital after costs and inflation.

The retirement industry in SA loves to blame investors for not saving enough, but the poor, weak performance of the JSE over 10-15 years means that even those who stuck to their retirement plans have had disappointing outcomes.

USA

Over the pond in the USA, it is not much different, even though investment markets have done spectacularly well, with the S&P500 having grown by an average of 10.3% per annum over 10 years in USD terms.

In his annual letter to shareholders of Black Rock, the world’s largest investment company, CEO Larry Fink recently raised the spectre of a “retirement crisis” for an ever-increasing number of Americans. In an interview with CNBC’s Jim CramerBlackRock Fink expressed optimism about the next generation despite a looming retirement crisis.

“I am bullish on these young people,” Fink said. “They’re smarter than we were at our age, they have a more global understanding of the world.”

But Fink stressed the seriousness of the retirement crisis, echoing sentiments he wrote about in his annual letter to BlackRock shareholders. Fink called for the government and the private sector to take action, saying the country needs an “organized, high-level effort” to ensure Americans can retire comfortably. He also wrote that his company — the world’s largest asset manager worth $10 trillion — was founded in part to help people retire, asserting that capital markets are essential to this goal.

“No other force can lift more people from poverty or improve quality of life quite like capitalism,” Fink wrote in his letter.

Fink said that 30 or 40 years ago, it wasn’t common to talk about saving for retirement. But now there’s no choice but to do so because the U.S. is not prepared to deal with such a fast-growing population of older Americans. Many put retirement “under the table because it’s not today’s problem,” he said.

To Fink, talking about these issues will help to mitigate them, while ignoring them will just make them more severe. He said it’s leaders like him who have the responsibility of “speaking the truth with facts, with consistency.” Fink said investing is an essential part of helping people save enough money to live well when they stop working.

“The key is putting that money to work,” he said. “It’s not keeping money in a bank account, it’s about the compounding of a return and building a retirement over a long horizon.

Meanwhile, back in the southern tip of Africa, the government is rushing legislation through parliament to introduce the so-called Two Pot Retirement system, whereby members of retirement funds would be able to access as much as one-third of their retirement values. There is rising fear amongst asset managers that the introduction of such a law will lead to a massive outflow of capital from funds, and hence the local stock market.

This warning was made earlier this week by Ian Williamson, CEO of Old Mutual, SA’s largest pension fund manager, who warned that the systems are not yet ready to handle such an expected massive withdrawal. The JSE, too, is likely to suffer as shares and bonds will have to be sold to pay out hundreds of billions of rands to members.

Such a move will also depress the performance of the JSE even further, already one of the weakest-performing stock markets over the past 5 years and more.

The retirement dreams of a generation of investors have been shattered by the combination of a sideways stock market and an even worse residential market, in most parts of the country.

Many retirees don’t always fully understand (or can calculate) the REAL returns of their invested funds. They mostly only see the rand values of their portfolios going up year after year, mainly boosted by continuing contributions, not understanding that the real value (i.e. after inflation and costs) is what needs watching.

In REAL terms most retirement funds in SA had had no or very little growth over the past ten years and even more. For a generation of 50-plussers 10 years ago – those retiring now or soon – it means a dramatic shortfall on their ultimate retirement capital, and hence the kind of income it can produce at retirement.

At the same time, prices of residential properties – except in certain areas of the country, especially the Western Cape – have also shown no growth in REAL terms.

In many parts of the country, the residential property market has ceased to operate as there simply just are few to no sales anymore, the result of collapsing infrastructure and corruption in municipalities.

The combined effect of these two factors is leading to a very poor outcome for people retiring. Plans of retiring to the coast have all but vanished and the dreams of international travel once a year have become unaffordable.

Added to this are two other factors: forced early retirement and longer life expectancy. Yet you still find people at the point of retiring think that a contribution of 30 years to a retirement plan, has created enough capital to secure an income for another 20 to 30 years after retirement. This is simply not doable.

This also is a major contributing factor to people at retirement seeking higher-than-normal yielding investments, which invariably fail.

Examples abound and include Sharemax, Picvest and more recently Ecsponent, all attracting billions of rands by offering higher interest rates before they eventually collapsed in one heap.

This is where the services of an independent financial advisor are so vital. At Brenthurst we spend a great deal of time investigating countless investment schemes that come knocking on our door. In most cases the answer is NO: this cannot work in the long run.

*MAGNUS HEYSTEK is a director and investment strategist at Brenthurst Wealth and can be followed @MagnusHeystek. Investment-related questions can be emailed to [email protected].

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