The 5 worst investment decisions for your retirement

When you’ve been in the business of giving South Africans the facts about their retirements for as long as Andre Tuck, 10X’s Investment Consultant Team Lead, you get to see just about every retirement situation.  We sat down to distil Andre’s decades of financial services experience into five key considerations for retirees, or people who are thinking about retiring soon.  

Did you know that you can speak directly to Andre about your retirement investments at no charge to you, and with no obligation? Or, if you don’t feel like talking, get a free comparison report to see if your investments could be doing better for you. 

The ultimate disaster: choosing the wrong pension product

When you retire you are obliged by law to use at least two-thirds of your retirement savings to buy an annuity, which will pay you an income in retirement i.e. a pension. You can choose between two types of annuity: a guaranteed (also known as a life annuity) or a living annuity. Not fully understanding the pros and cons of each could be hazardous for your retirement and terrible for your family.  

With a life annuity, the insurer pays you a specified monthly pension for the rest of your life. Choosing a life annuity insures you against longevity risk (the risk that you outlive your savings) as well as investment risk (depleting your capital too soon due to inadequate investment returns).  

You do not, however, have any control over how your money is invested, nor do you have any flexibility to draw a lower or higher income when your expenses change. Also, your policy dies with you, and no money passes to your heirs.  

A living annuity transfers the risk and responsibility for securing an adequate income for  your retirement to you. In return, you have greater investment and income flexibility, and your heirs inherit whatever is left of your capital after your death (which as mentioned, isn’t the case with a life annuity – in the majority of cases, the insurer will keep your capital).  

If you want to understand more about potential living annuity income, use our free living annuity calculator to do your sums. 

Choosing between a living and a life annuity at retirement requires a careful evaluation of your personal needs and circumstances. This is a critical decision – with income, tax, estate planning and risk implications – so you should consider your options carefully before committing. 

Drawing down too much can threaten your nest egg 

The Brand Atlas Survey, which tracks the lifestyles of the 15 million economically active South Africans (those living in households with a monthly income of more than R8,000), found that 79% of those who do have a retirement savings plan are unsure they will have enough money to maintain their lifestyle in retirement.   

Retirees who have selected a living annuity, rather than a life annuity, get to have some control over their money in retirement, as well as leave an inheritance. That flexibility comes with the responsibility to calculate a sustainable drawdown to ensure they avoid outliving their savings.   

When calculating how much money you can draw each year you need to consider your time horizon, your asset mix and the fees you pay. The conventional approach is to set your desired income upfront by using the “4% rule”. This refers to research done by economist William Bengen in 1994, which outlines that investors can safely spend 4% of their initial capital, growing annually with inflation, for 30 years, independent of stock, bond and inflation gyrations, assuming a 60%-40% mix of stocks and bonds (this model might not hold up for a more conservative asset mix).   

There are other ways to apportion your savings. It is important to do your research and consult with your fund provider about choosing the approach that is best for you. Financial planning tools, such as the 10X Living Annuity Calculator can help you find your optimal sustainable draw-down rate, based on your estimated life expectancy and other parameters.  

Paying high fees can erode your income, quickly 

While most retirees know that their drawdown rate is an important lever to ensure their savings last, few retirees realise that the fees on their living annuity are likely to be their single biggest expense in retirement. The latest Retirement Reality Report found that 50% of retirement savers don’t know what they are losing to costs or say there are no fees at all (which is obviously wrong). But if there’s one thing you really should know about, it’s the fees you’re paying on your retirement investments. Ask your service provider or financial advisor for your effective annual cost (EAC) and then use our EAC calculator to see whether you’re paying too much. 

To illustrate the cost of high fees (assuming an ‘all other things being equal’ methodology and only accounting for fees, not performance, inflation or other variables): With a drawdown of 5% from a R4,8 million pension pot, a retiree would receive a pre-tax income of R240,000, or R20,000 per month. At a common fee level of almost 3% per year (typically made up of advice, administration and investment management fees) they would be paying costs of around R144,000 per year (R12,000 per month). Which means, they are paying themselves only two-thirds more than the service providers. Or, from another perspective, almost 40% of their drawdown is spent on fees.  Consider the below graph, which shows the difference in 1% and 3% of fees over time: 

Retirees who are unsure about the fees they are paying should ask 10X Investments for a free, no-obligation cost comparison.   

Panic selling when the market is down can lock in losses 

Considering recent events in global equity markets, this might currently be the most pertinent thing to remember. Investing in growth assets like equities can be a great way to increase your wealth. But inevitable periods of market volatility may test your nerve. You might feel the urge to panic and change your asset mix when you see a sudden sharp drop in the value of your portfolio. But giving in to your emotions and switching when the market is down will likely lock in your losses and leave you with the prospect of a permanently lower income thereafter.  

Want to talk through the facts about your investments and see whether they could be doing more for you? Get in touch.  

Based on global life expectancy figures as reported by the World Health Organisation, individuals who retire at 60 are likely to live another 20 years or more, which means they have time on their hands to ride out bouts of market weakness and recover any losses. The trick is to keep your eyes fixed on your long-term horizon and not react to short -term market events, such as we have been seeing lately.  

In volatile times, you might consider whether the fund you are invested in is designed to mitigate these types of inevitable market fluctuations, and give you the peace of mind you’re looking for in retirement. At 10X, we feel our flagship Your Future Fund does just this. 

Underestimating your expenses could mean nasty surprises

Your financial situation is likely to change during retirement and it is important to keep your budget up to date so that you can respond confidently to sudden expenses or opportunities. A vague plan based on the assumption that you’ll be spending less money in retirement simply isn’t good enough.   

The Brand Atlas Survey found that just 7% of savers have full confidence in their plan. This confirms that vague ideas aren’t enough: you need a plan that’s workable, realistic and up-to-date. The same goes for your budget. A guesstimate won’t help much – you need to get into the details.  

While expenses such as travelling for work or bond repayments will likely fade away when you retire, your spending will probably increase in other areas, such as healthcare. Healthcare is an important area to consider when planning your retirement budget. According to Statistics SA, most causes of death in South Africa are attributed to non-communicable diseases, such as stroke or heart disease, manifesting mostly in older people. If you don’t provide sufficiently for healthcare, your retirement could become a costly and stressful exercise in paying off medical bills.   

Another factor to consider is that as a retiree you might find yourself looking for ways to fill your time. The cost of hobbies – such as travel, eating out, sports and other entertainment – can really add up. Create a detailed and realistic budget to help you to manage your money, instead of allowing it to control you. 

A stress-free retirement is possible, but to ge there you need to get actively involved in the nitty gritty of your finances. While financial advisors certainly can add a lot of value, they also come with a cost. If you’re looking to get the facts and all the information you need, you can always talk to a 10X Investment Consultant free of charge. There are no call centres at 10X, just experience humans ready to help.