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Retirement Planning
Sunday, January 1, 2012
Old but be wise

Last year was a difficult one for those in retirement, especially as our interest rates have remained at their lowest levels in over 30 years. Equity markets have been weak, while inflation has started creeping up making it harder to maintain the same lifestyle.

But, says Simon Pearse, CEO of Marriott Asset Management, retirees should not be tempted to overdraw on their capital. Although investors with a living annuity may usually draw up to 17.5% of their capital each year, taking the maximum obviously risks eroding their capital base, which would reduce future income streams. By preserving capital, investors will be able to provide for their retirement for longer periods.
“So we recommend that retirees restrict their withdrawals to the level of income being produced by the selected investments. While investors may find it challenging to do this, it is far preferable than finding one’s capital has been completely (or even partially) eroded.”
Rather be conservative now, he says, than risk having to find another source of income (such as going back to work) or having to reduce one’s standard of living at some future point.
Pearse believes we need to budget for higher inflation, which up to now has to some extent been masked by the strength of the rand. “We believe that inflation is likely to average at least 7% over the next decade, and possibly be higher.”
He advises clients to acquire a blend of cash, bonds, real estate and equities to generate the required income, bearing in mind that the choice of equities should include only those that generate a reliable, growing income stream. For future income requirements, an investor’s portfolio choice is one that aims to accumulate capital and grow its value. “This can be achieved by a combination of reinvesting income, which accumulates more capital and income growth which renders the capital more valuable.”
Pearse says that clients should pay particular attention to taxation issues. “Do not pay more tax than you need to. When planning for future income requirements by maximising capital accumulation and capital value growth, the blend of investments should be influenced by income tax considerations as well. Where income reinvested is tax free, sa for example, in retirement annuities, preservation funds and living annuities, the portfolio should be biased toward higher yielding (lower risk) investments like income funds. However, where income is taxable, the portfolio should be biased toward higher income growth investments like equity funds which generally produce tax free dividends (the higher risk).”
One point he emphasises is, whatever you do, do not monitor the price of your investments every day. “This is not constructive.” It can lead to panic and emotional, poorly thought out decisions that end up destroying value.
‘Rather monitor the income that is being produced by those investments.’ And ignore short term capital volatility.

Copyright © Insurance Times and Investments® Vol:25.1 1st January, 2012
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