Question:
My retirement annuity broker wants to revive a Momentum Balanced Growth Fund. The two retirement annuities he wants to transfer are Old Mutual Smoothed Bonuses Funds. The amount at Old Mutual is R1025 000.00 and the amount at Momentum is R446 698.00. My broker wants to transfer the Old Mutual funds to the Momentum policy. I am 48 years old in August this year. What is your best advise on my way forward to retirement?
Answer:
Ian,
We cannot use this forum to offer individual advice, and obviously we have far too little information to do so. Our answer therefore has to be somewhat generic.
Firstly, retirement saving is a (working) life time pursuit. Life expectancies are increasing, which means we all require more money to fund our retirement years. This is a global phenomenon. You therefore need to keep saving (contributing to a retirement fund) until you stop working. Resuming your retirement annuity contributions is therefore a good idea. Consolidating your retirement annuities is also a good idea as you are presently duplicating some costs.
When will you have enough? That is the critical question. The answer depends on the life style you expect to retain in retirement, and when you plan to retire. The sooner you plan to retire, obviously the more money you will need to have saved. The money that you have saved should be enough to allow you to purchase an annuity (monthly income) that replaces at least 60% of your final salary.
You can find out more about this concept on the 10X web site in the Financial Education sector. This section also includes a very simple but powerful retirement calculator, that will give you a sense where you stand relative your retirement goal (final income replacement ratio), based on your current income, your accumulated savings and your age/expected retirement date. It factors in normalised long-term real market returns, but you can simply change this input (raising or lowering the return). All our projections are in real (after-inflation) terms to give you a true sense of what your money will buy in retirement. The calculator will give you a sense how much you still need to save monthly to reach your goal. If the amount required is unaffordable, it will give you a sense of how much you (will) need to cut back on your life style.
As you are saving through retirement annuities, I presume you do not have access to a work place retirement fund. There are two things you need to focus on in your retirement annuity: fees and your asset allocation. Your fees should be as low as possible. Understand that a balanced portfolio (75% in equities) has historically delivered a real (after-inflation) return of only around 5% pa – before fees! Fees of 2% or 3% therefore reduce your real (wealth-building) return tremendously. The average fee for SA retail investors such as yourself is 3% – that means you lose 60% of your real return (actually more like 75%, after compounding for 40 years). It effectively halves the value of your final pension. So find a low cost retirement annuity.
Your asset allocation should match your time horizon. At 48, you can still afford to assume considerable equity risk, if you plan to retire at 65. At 10X, we maximise the equity exposure until 10 years before retirement, to (hopefully) benefit from the long term high real returns delivered by equities over time. In the last ten years before retirement, your focus should shift from growth to preservation. At 10X we gradually (and automatically) reduce the investor’s exposure to equities, and replace it with bonds, and, near retirement, primarily with cash.
Finally, think about whether you want your savings managed actively, or through indexed funds. Active managers typically charge higher fees, but many studies have shown that, over time, very few of them deliver higher returns than index funds. It is not possible to predict who those "winners" will be. By investing in a market index fund, you secure the average market return at a low cost. Plus you do not have to place bets on individual RA fund managers, some of whom may do very well for you, but some may do very badly. Remember: past performance is no guarantee of future performance. You cannot afford poor (well below average) outcomes. Retirement saving is about securing your minimum goal with the least amount of risk. Anything more is a bonus. Holding on to the one bird in your hand is definitely the safer, more sensible and more pragmatic option than speculating on two in the bush.
