NOTICE | Retirement planning in a world of war, pandemics and natural disasters


Maybe you’ve progressed through the phases of financial planning, are now approaching retirement, and the thought of tapping into your retirement savings is keeping you up at night. But there’s comfort to be had, written Theoniel McDonald.

We live in a time when the world is literally changing every day, a world seemingly filled with wars, pandemics, extreme weather events, disasters and a lot of uncertainty. For those planning their retirement, this can cause a lot of anxiety and doubt. I hope I can help reassure you.

The Swedish physician and scholar, Dr. Hans Rosling, in his book Loyalty, illustrates how the world and the media would have us believe that things have changed for the worse. The well-known expression “The good old days” comes to mind. However, various statistics prove that much of the world is now significantly better off than it was 50 years ago. Some of these statistics include the number of people having to live on less than a dollar a day, the under-five mortality rate, births per woman, access to vaccines, literacy and possession of cell phone, to name a few.

These statistics clearly illustrate how things have improved over the past few decades. However, the reality is that good news is often less sensational and therefore less widely distributed. Gone are the days of waiting for the 7 a.m. news to find out what’s going on in the world. Today we are all surrounded by the latest up-to-date news as it happens around the world. During the Covid-19 pandemic, we all became virologists and were aware of infection rates, death rates, and hospitalization rates around the world. Now we are all following the war in Ukraine with the greatest anticipation, as we realize how quickly things can escalate and spill over to the rest of the world. As this unfolds, closer to home we are experiencing some of the worst flooding of our generation with billions of rands in damage and the loss of hundreds of lives.

All of this noise is undoubtedly causing a lot of uncertainty, fear and worry when it comes to planning your retirement.

Maybe you’ve progressed through the phases of financial planning, are now approaching retirement, and the thought of tapping into your retirement savings is keeping you up at night. But there is comfort to be had. Even if no one has the crystal ball that will guide us to predict the next pandemic, the duration and the end of the war, or any other disaster that may impact your retirement capital. The only solution is to follow proven principles that are often not very exciting and somewhat boring, but will make your capital outlast you.

So where to start ? Don’t try to go it alone! Increase your own knowledge base by all means, but find an experienced financial planner or wealth manager who can guide you through the process. Extensive research in behavioral psychology has shown that when it comes to our own capital, we have various biases that influence our decision-making.

So, besides a potential lack of financial and investment knowledge, we are also at the mercy of several biases that will impact our behavior. An experienced wealth advisor or manager will not only help you with tax decisions, product choices or underlying asset allocations, but will also guide you with due regard to your risk profile in times of stress when your natural reactions could negatively influence your investment decisions. and the results.

Know what to spend

Costs are significant, but professional input and advice cannot be expected without paying a fair fee. The question then remains, what is fair for the advisor but reasonable with regard to the service rendered and the impact on your retirement capital? The starting point would be to understand how much you are paying and what you can expect for those fees. Typically, you can expect to pay for initial advice and/or retirement plan, then ongoing fees for management and annual reviews. I recommend that you get more than one quote from reputable advisors or wealth managers. Ongoing fees include platform/admin fees, investment management fees, and advisory fees.

If your old-age capital comes from a pension, provident, preservation or retirement annuity fund, you will then have to decide on a capital up to the legal maximum. You should also consider the amount of discretionary capital you would need in retirement. Typically, this would include an emergency fund, capital to settle debt, and/or capital to invest to provide income.

Besides the one-third limit on some retirement products, the most important factor to consider in the lump sum is the tax payable on it. Often, retirees choose to take the full third to have the maximum amount of discretionary capital available. This decision could result in the deduction of a significant amount of tax from the lump sum, leading to an erosion of capital that is virtually impossible to recover at this stage of your investment journey.

Consideration should be given to the required lump sum (considering debt, emergency funds and income) with a reasonable amount of tax payable on the lump sum. A good yardstick to use is lump sum tax versus your average tax rate.

One of the main factors that will influence the life of your capital will be the underlying asset allocation of your portfolio. This is the next step in the puzzle and will ultimately determine the duration of your income, the volatility of your capital, and your exposure to unforeseen local and global events. For example, if we consider the extremes, a portfolio invested 100% in cash will not be volatile but will struggle to outperform inflation over the long term.

Your greatest risk then is the likelihood that you will run out of capital. At the other extreme, if you have a portfolio that is 100% invested in equities (stocks), your portfolio will likely significantly outperform inflation over the long term. This, however, comes with short-term volatility influenced by daily market movements.

If you derive income from such a portfolio and your portfolio is exposed to a market decline, then your portfolio will need to sell more units of the fund to provide the same income. In this way, the capital of your portfolio could be significantly eroded. To add to the complexity, there are also government and corporate bonds, ownership, and all those assets in the offshore space to consider.

The key, therefore, is to build a portfolio of a mix of these assets to allow for sufficient capital growth, while providing predictable income that will last your lifetime. A well-diversified portfolio will therefore not only provide you with income security, but can also provide the crucial diversification that can protect you against unpredictable shifts in asset class, currency, or local and global market fluctuations.

The next step would be to decide on the appropriate products. It can be a life annuity, life annuities, discretionary products, endowments, equity portfolios, etc. This choice is generally influenced by your income needs, collateral requirements, taxation and capital liquidity. Retirees often mistakenly focus on the product before giving enough thought to tax and asset allocation. These days, product combinations are often selected that allow for a mix of guaranteed products and market-exposed products that provide capital growth in excess of inflation.

Protecting your retirement portfolio from catastrophe therefore hinges on the process of selecting the right advisor to help you decide on the right lump sum, asset allocation and products. This, combined with a mindset that shrugs off all the noise in the short term and focuses your investment strategy on the long term by regularly reviewing the portfolio, your earnings and the underlying asset allocation, will finally give you the peace of mind you should be entitled to during your retirement years.

Theoniel Mc Donald CFP® is Managing Director of Wealth Associates Central, Strategic Marketing Director of Wealth Associates South Africa and Vice Chairman of the Financial Intermediary Association (FIA). Opinions are his own.

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