24 March 2021
Often, ‘conservative’ and ‘safe’ are used interchangeably to describe a scenario where most risks are mitigated, giving you peace of mind. When investing in, for example, interest-bearing funds, this ‘safety’ is largely owed to a low risk of capital loss and low market volatility.
But when it comes to your retirement planning, being too cautious can have the opposite effect: you could end up with an uncomfortable retirement after years of hard work. As Denis Viljoen, Business Development Manager at Glacier by Sanlam, explains: “Everyone deserves to retire with dignity. Unfortunately, if your money is invested too conservatively, you might wake up one day to the reality that your savings are just not going to afford you that dignity,” he says.
When you’re in an ‘up’ market, you want to enjoy a piece of the pie (i.e. investment returns). A conservative approach to investing doesn’t offer this. “If minimal risks are taken when investing because your focus is on generating constant cash flow, the underlying portfolio will tend to underperform during rising markets,” says Denis.
Besides returns, inflation is also a vital consideration when selecting the right retirement income solution. Again, a conservative approach doesn’t necessarily account for this, which means your investment won’t meet or beat inflation. “Equity exposure is vital for income to keep up with inflation,” Denis continues.
Diversifying your asset allocation is vital for mitigating market risks and securing your capital in the long term. With this approach, you can rest assured that a single event won’t wipe out your entire portfolio. “In a diverse portfolio, assets are less correlated; when one rises, the other one’s value may fall, and vice versa,” explains Denis. “It’s your best defence in a financial crisis.”
To achieve this, look at including more growth assets that are uncorrelated in your portfolio to decrease volatility.
Lower volatility leads to additional returns when income is taken because it helps manage what we refer to as sequence risk – the risk of your portfolio losing value during a market downturn just before or after retiring. “Look at diversifying between offshore equities, local bonds and local equities,” Denis suggests.
shares Denis. The impact of this is a greater risk of running out of capital, and in instances where leaving a legacy to beneficiaries is a retirement goal, the opposite happens – with beneficiaries often having to take care of their retired loved ones instead. “Combining different retirement income solutions balances capital preservation and growth,” says Denis. “This allows you the freedom to live your life fully and enjoy peace of mind.”
Combining a life annuity and a living annuity harnesses the benefits of both solutions for an optimal income that takes care of fixed costs and ad hoc expenses. “The advantages of buying both these solutions are that you’re guaranteed an income for life, you can benefit from possible income growth in the future since your investments have market exposure, and when you pass away, the remaining capital in your living annuity can be passed on to your dependants,” explains Denis. You also have the flexibility to adjust your income percentage if markets take a dip.
A financial adviser is key to helping you realise your retirement income goals. By reviewing your assets and liabilities to determine your total wealth, they can partner with you to answer questions you have about your retirement and suggest the right income solutions depending on your financial standing, risk appetite, longevity risk and sequence risk. “There is no place for a single product anymore. A financial adviser has to consider all offerings in combination to meet a client’s very personal, specific needs,” says Denis.
Partnering with a financial adviser allows you to have confidence, knowing that you are moving in the right direction to realise your retirement goals, but are also in trusted hands to receive ongoing advice as and when your retirement goals change.
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers.
Glacier Financial Solutions (Pty) Ltd is a licensed discretionary financial services provider, trading as Glacier Invest FSP 770