If you are recently retired, your portfolio value was probably at its highest and you really feel your rand loss more acutely. If possible don’t look at your retirement fund balance every day. Rather find ways to take care of your physical and emotional health: keep mobile, eat well, stay connected to family and friends.
There really is no point obsessing, panicking even, about things that are beyond your control. Remind yourself that the point of having a long-term plan is to avoid knee-jerk reactions in extraordinary times, such as these.
The intuitive approach is to invest defensively post-retirement, that is, in a low equity or defensive portfolio that invests mainly in cash and bonds. This would give you low but predictable returns, without the volatility that investors in high equity funds are experiencing.
The defensive route is going to give you a calmer ride, but it may not take you as far as you need to go. Even though you have retired, your savings probably have to support you for another 20 years or more, which means you are still a long-term investor. You should invest accordingly, with a high allocation to shares (equities), which is the most reliable long-term growth investment.
Investing in a high equity portfolio rather than a defensive or low equity one has historically delivered higher returns over periods of 5 years and longer, so this strategy should make your savings last longer, and/or afford you a higher sustainable income. But it does come with the risk of a big market downturn.
How can I preserve the capital in my Living Annuity?
Each year, you get only one chance to change your income. If the market drops just after that, you will effectively be drawing down at a higher rate. If you set your draw-down rate at 5%, and your portfolio loses 20% in value, you are then drawing down at 6,25%.
A temporary pullback might be manageable, but if the decline persists it could shorten the lifespan of your sustainable income.
Many annuitants were already drawing down too fast, even before this hiatus. According to the Association for Savings and Investment South Africa, the average living annuity drawdown is around 6,6% pa.
To make things much worse, many are also paying high fees, in some cases, close to 3% pa. This is typically made up of 0.75% for advice, 0.25% for administration, 1.5% for investment management and 0,4% for VAT. Their total effective annual draw-down is then close to 10%, which is unsustainable even at the best of times.
For these investors, switching to a low-cost living annuity (charging 1% or less per annum), would, over time, more than neutralise the 20% loss in their portfolio value.
Whether or not you are already keeping your costs low, you could look to counter the market value lost in your portfolio by reducing your annuity income.
If you normally request one annual payment, consider switching to a monthly one, to reduce the timing risk of drawing your entire income at a market low. A recovery may well be underway in a few months’ time, or sooner, which would moderate the impact. In times of crisis, such as we are facing now, you won’t have to wait a few months, the markets can experience big moves from week to week, as we have seen in the last few weeks.
If your policy anniversary date is coming up, consider lowering your draw-down rate for a year or two, to preserve your savings.
If you have just passed your policy anniversary date, then you are bound by that until next year. In that case, try to cut back on your spending and reinvest some of your income, possibly into an RA fund. You could save some tax and also return your savings to the market, buying back at a low price what you were forced to sell at a low price.
Of course, you might be thinking you could improve your situation by switching into cash at this time. Markets could fall further and enable you to reinvest at a lower level. But getting this timing correct is tricky, especially as you need to be right, not once, but twice.
Markets may go lower still, but then again, they may not. If they don’t, you are locking in your losses. Finding the right time to switch back is even harder. Equity markets turn well before sentiment does. And share market returns are sporadic. They don’t present smoothly; much of the action happens around inflection points.
Missing out on initial bull market gains could cost you many years of the ‘annual average return’. Or it may cause you to stay out of the market altogether, as you wait for the next big crash to get back in. Some investors have been waiting for that opportunity since 2009. They have it now, but perhaps not the confidence to jump back in, when there is again so much fear and uncertainty.
Really, the best thing you can do right now is to take care of your physical and emotional health and stick to a long-term investment strategy based on proven principles: maintain a high allocation to equities, don’t try to time the market, don’t try to beat the market with stock picking (use an index fund instead), and keep your costs low, ideally below 1% pa.
Remember that the point of a long-term investment strategy is to anchor your decisions during difficult times and to protect yourself from over-emotional choices. This strategy may not deliver the optimal return this year, but you can be very confident that it will deliver optimal return across all the years.
