Retirement annuities in times of economic uncertainty - should you change your strategy?

When an economic downturn hits the investment markets, it can have a significant impact on your retirement savings. Economic downturns can be caused by a variety of events. Most recently we saw the financial crisis of 2008 and the COVID-19 pandemic; these events have an impact on global markets and therefore investment returns, and, subsequently, peoples’ behaviour related to their savings and spending.  

Retirement annuities are a pre-retirement savings vehicle which allows people to save their money to provide for their retirement. In comparison, life and living annuities are post-retirement investment vehicles which provide an income for the retiree. These are usually funded upon retirement, from age 55, by a lump sum amount transferred to the life or living annuity from one of the retirement savings vehicles, such as a retirement annuity.  

In times of economic uncertainty and volatility, retirement savings and investment vehicles across the board will be affected, so it is important to regularly review and update your investment and retirement plan accordingly. This article explores how factors such as inflation, high fees and market downturns affect your retirement annuity, and how you can mitigate the effects of these by taking actionable steps, such as adjusting contributions and asset allocation. 

How economic uncertainty impacts retirement annuities  

The effects of inflation on retirement annuities

Inflation has the effect of reducing the purchasing power of your money as well as your retirement savings over time. Inflation essentially decreases the amount of goods and services that you can purchase with a nominal value of money, because the cost of these goods and services increases. If your retirement savings are not outperforming inflation, then this results in your retirement savings losing more and more value over the long term. Inflation in South Africa has historically been around 5% to 6%, so if your retirement savings are not outperforming this, or at least keeping pace with inflation, then the purchasing power of your capital is being reduced. By ensuring that your retirement annuity is invested in a diversified portfolio which includes a percentage of the investment invested in equities, you are mitigating the effects of inflation.  

This is because equities are the most likely asset class to outperform inflation by a healthy margin. However, it is also the most volatile of the asset classes, and therefore the most likely to take the biggest hit during economic downturns. Over the long term though, equities have been shown to usually outperform inflation, thus allowing your capital to grow and compound this growth over time, and thereby reducing the effects of inflation on your retirement savings. Here at 10X, we offer a wide range of funds, each with a different mix of asset classes. Our flagship Your Future Fund has a stated aim to beat inflation by 5.5%. Find out more about our funds here or speak to one of our knowledgeable investment consultants for any questions you may have.  

Fees and their impact on RAs

In times of uncertainty your thinking naturally shifts towards preserving the capital you have right now, and getting the most out of whatever return potential exists. Whether you know it or not, the fees you are paying on your retirement annuity are one of the biggest predictors of investment growth, because they have a direct effect on how much investment return you see. So, understanding your fees should be the first step in evaluating and comparing your retirement annuity.  

High fees have the effect of decreasing the value of your retirement investment over time, and so it’s important to select a service provider that charges low fees. 10x offers competitive fees of 1% or less, depending on how much capital is invested, compared to other service providers, who may charge fees of 3% or more. When compounded over time, fees of 3% per annum can seriously impact the money you have avilable in retirement, so it’s important to select a provider with minimal as well as transparent fees. 

The Effective Annual Cost was introduced by ASISA in 2015 and gives you a complete view of all of the costs associated with your investment product. These would include fees such as management fees, investment fees and advice fees. You can request your EAC from your service provider. 

 This EAC calculator is a useful tool to show you the total costs that you would pay on a retirement annuity with 10X. You could then compare these findings to what you are paying with your current service provider. You will find that with 10X, there are no hidden charges or costs, and the fees you do pay are transparent, simple and easy to understand. 

Market downturns and volatility: How RAs respond

Equities are the most volatile of the asset classes that your retirement annuity is invested in. If you have a large portion of your retirement annuity invested in equities, this could result in the total value of your investment dropping if the equity markets take a hit. But, equities have also shown that over the long term, they bounce back as markets recover.  This makes equities a great choice for investors who are looking at longer time horizons. If your retirement annuity includes a diversified portfolio across the various asset classes like equities, bonds, real estate and cash, this can help mitigate against shot term losses of the kind described above.   

Bonds and cash will also add more stability to the portfolio if you are looking at a shorter time horizon and are aiming for a more conservative portfolio. History has shown us that a well-diversified retirement annuity tends to recover from any losses over the long term. 

Should you change your RA strategy during economic uncertainty? 

When should you adjust your RA contributions?

Consistent investing, with as early a start as possible, is often touted as the key to retirement wealth, as it helps you develop a savings habit over time, and gives you the time in the market you need to see good returns. If you have a regular debit order going into your retirement annuity, you are less likely to not contribute for a particular month or period of time. This can also help to avoid any knee-jerk reactions or emotional decisions when it comes to investing in response to a time of economic uncertainty or volatility.  

There could be valid reasons why you may need to reduce or stop your retirement annuity contributions, such as if you happen to lose your job or experience a reduction in your income.  Market downturns, on the other hand, are slightly different. It could be argued that it makes sense to keep contributing to your retirement annuity when there is a downturn in the market. That would mean that you are purchasing more units at a lower price. When the market recovers, these additional units will increase in their value and this will compound over time and result in capital growth.

Asset allocation strategies in uncertain times

During uncertain times, you can look at ways to manage your asset allocation to try and mitigate any potential risks. Let’s look at some of the strategies that you could consider:  

• Ensuring a diversified portfolio: By making use of a diversified portfolio which is spread across different asset classes, geographies and industries, you are hedging against any losses. 
• Include bonds: Including bonds in your portfolio can act as a hedge against inflation, especially useful in times of uncertainty. 
• Review your investment portfolios: Regularly reviewing your investment portfolios to ensure that they still meet your financial needs and retirement goals is essential, especially in times of market volatility and uncertainty  

Some investors might switch to a more conservative investment strategy as they become more risk-averse during times of volatility. This could result in lower returns and missed opportunities to generate growth in the investment. The question that should always be asked is whether you are adequately diversified in the first instance: trying to time the market is never a good idea. 

The risk of making emotional investment decisions

It’s important to have a well thought-through financial plan that you can turn to - and stick to - in times of market uncertainty. This can provide you with guidance and grounding that can be beneficial, and can help avoid any knee-jerk reactions or emotional decisions. It can be a natural reaction to panic sell during a market downturn, but this can damage the potential growth of your investment or retirement savings in the long term. If you don’t have the facts you need to build a plan you can be confident in, talk to a 10X consultant, free of charge.  

Expert-backed strategies to protect and grow your RA in uncertain times 

A well-diversified portfolio that includes a mix of equities, bonds, real estate and cash is crucial during times of economic uncertainty. The idea of not having all of your eggs in one basket and spreading your funds across the different asset classes can help alleviate losses and reduce your overall risk. The exact fund that you opt for depends on factors like your risk tolerance, retirement goals, time horizon, fees, and of course, the market conditions.  

If you need more information on how to select the right fund for your needs, the 10x investment consultants are more than happy to discuss your options with you. 10x offers a range of different RA funds for you to choose from, with different asset allocation strategies in each. We’ve covered a few of them below: 

10x Your Future Fund: Our flagship offering, the Your Future Fund is carefully constructed to deliver cost-effective exposure to a wide range of local and international asset classes. The fund offers higher allocation to growth assets such as equities and property, making it well suited to investors in search of long-term capital appreciation to build their wealth. With diversified exposure across several asset classes and locations, the Your Future Fund has consistently outperformed benchmarks and other comparable funds. Regarding the asset allocation, 33.9% is allocated to SA Equity, 24.5% is allocated to International Equity, 14.1% to SA Inflation-Linked Bonds, 5.8% to SA Money Market, 5.5% to International Money Market, 3.4% to SA Property, 3.1% to International Nominal Bonds, and 2.7% to International Inflation-Linked Bonds. This makes for 64.2% local and 35.8% offshore exposure.  

10x Income Fund: The 10x Income Fund is particularly well-suited to investors seeking a high level of income and long-term capital stability. The fund has been meticulously constructed to help investors reach objectives with cost-effective exposure to a diverse range of international and local interest-bearing assets. The returns may fluctuate in the short term, but the fund is well-suited to investors with a time-horizon of over three years. The 10x Income Fund is designed to offer long-term capital stability with a current 12-month forward yield of 9.8%. In terms of the asset allocation, 41.8% is tied to SA Inflation-Linked Bonds, 35.5% is tied to SA Nominal Bonds, 12% is allocated to SA Money Market and 10.8% is allocated to International Bonds. As such, fund exposure sits at 89.2% local and 10.8% offshore.  

10x Defensive Fund: The Defensive Fund is best for investors seeking a consistent level of income with capital growth at low volatility in the medium term, achieved via cost-effective exposure to diverse local and international asset classes. The Defensive Fund has a higher allocation to defensive assets, such as bonds and cash, than to growth assets like equities and property. The ideal time horizon is one to three years and longer, as returns in the short-term may be more volatile. The asset allocation is as follows: 30.6% to SA Inflation-Linked Bonds, 17.9% to SA Equity, 14.7% to SA Nominal Bonds, 13.8% to International Equity, 10.3% to SA Money Market, 3.9% to International Money Market, 3.8% to International Nominal Bonds, 3.2% to International Inflation-Linked Bonds, and 1.7% to SA Property. Fund exposure is therefore 75.3% local and 24.7% offshore.  

10x Moderate Fund: The 10x Moderate Fund is best suited to investors seeking with a lower volatility than a high-equity portfolio over the medium to long-term. The fund has a higher allocation to growth assets like shares and property compared to defensive assets like bonds and cash. The recommended time horizon is three years or more, as short term returns are likely to be more volatile. The fund asset allocation is as follows: 28.4% to SA Equity, 21.6% to SA Inflation-Linked Bonds, 19.6% to International Equity, 11.7% to SA Nominal Bonds, 5% to SA Money Market, 4.9% to International Money Market, 3% to International Nominal Bonds, 2.9% to SA, and 2.9% to International Inflation Linked Bonds. This makes for 69.6% local fund exposure and 30.4% offshore exposure.  

Each of the above funds have a distinct strategy in play and each is suited for different types of investors. By assessing your financial situation and your investment objectives, you can determine which fund makes the most sense for you. The 10x investment consultants are also more than happy to discuss the different funds available to you. 

10x’s Investment Approach 

At 10x, the investment approach is focused on three main areas. Firstly, asset allocation (equities, bonds, real estate, cash etc.), with the belief that this is the most important indicator of the success of your investment. Good asset allocations include a mix of asset classes and both local and offshore exposure. The asset allocation should be regularly reviewed and adjusted according to market conditions. Secondly, 10x also stresses the importance of low management fees. The compounding effect of high fees over time can have a significant negative impact on capital growth.  

Thirdly, index funds have been shown to outperform actively managed funds over time as well as being more cost-effective. The 10x Retirement Annuity has a number of funds which you can choose from, each with a different asset allocation and returns history. Follow this link to find out more details on the funds on offer. 

Final thoughts on your retirement annuity

In conclusion, it’s clear to see that retirement annuities can be affected by times of economic uncertainty, but by sticking to your financial plan and making strategic changes, you can potentially protect the value of your retirement annuity and perhaps even enhance your retirement savings. Emotional and knee-jerk reactions should be avoided; rather stick to your financial plan and take a long-term view. It’s important to be financially literate and ensure that you regularly review your retirement annuity and make changes as needed, as your financial needs or market conditions warrant.  

The 10x website contains a wealth of resources and information that can help you on your path to financial literacy. Our retirement annuity offers low fees, a diversified portfolio structure, and aims for superior returns. It is easy to track the performance of your retirement funds via our easy-to-use client portal. Read more about it here or feel free to contact one of our expert investment consultants for more information.