Money …
THE REAL COSTS OF DERISKING WHEN YOU RETIRE
T
he sad truth in South
assets (cash and bonds); but these
have generally produced a real
Africa is that many people
assets will not provide them with
return of around 5% per year.
face a high risk of running
sufficient inflation-beating returns
For investors who haven’t saved
throughout their retirement.
enough for retirement, these
out of money in retirement. However, what most people don’t realise is that, ironically, what is increasing their risk of running
Over the past 40 years,
potentially higher returns, plus
bonds and cash have
the extra years spent in growth
historically delivered real returns of 2.9% and 2.0%
assets, can both play a crucial role in extending the longevity of their retirement income. This is
out of money
respectively per
particularly important these days
in retirement
year. Meanwhile,
given people’s longer life spans,
is their fear of
equities have
where you can easily spend 30-
losing money,
outperformed
plus years in retirement.
which is driving
inflation by
them to invest more conservatively when they reach retirement. Here we examine the true costs of
7.2% per year over the same period. Combining these assets in a typical ‘balanced’ portfolio of
To illustrate this point, Graph 1 shows the length of time your money would last if you de-risked your investment from a typical balanced portfolio earning a real 5% p.a. to a cash portfolio earning
investing conservatively after you
around 25% in fixed income and
a real 2% p.a. when you retire at
retire.
75% in equities and property
age 60, compared to remaining
The premise of this strategy is to de-risk your portfolio at (or even before) retirement, in order to avoid any big losses. Investors choose less volatile fixed-income assets (such as cash and bonds) as they move into retirement in order to minimise volatility or their risk of capital loss over the short term. One of the major drawbacks of this approach is that it limits your investment’s growth potential exactly at the time when your retirement capital is typically at its highest-ever value. By design, at retirement clients are choosing what they believe are low-risk 36
SILVER DIGEST //SPRING 2019
