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Retirement Planning
Friday, February 22, 2013 - 18:38
Rate victims …

South Africa has a new class of vulnerable, threatened citizens – ‘rate victims’ - on pension who are reeling from the prolonged effects of historically low levels of interest.

According to Johan Gouws, Head of Absa Asset Consulting many of these victims need to make rapid adjustments to their financial plans as low interest rates may well persist. He says some pensioners now make do on less than half their previous income and adds, “In less than four years the Reserve Bank has cut interest rates by seven percentage points.
“During the final quarter of 2008, local investors received approximately 12% interest on their investments. A pensioner with R1 million of retirement capital would therefore have received around R120 000 in interest or R10 000 a month. After the most recent interest rate cut in July 2012 an investor with R1 million of retirement capital now receives about 5% interest, equating to just R50 000 a year or roughly R4 200 a month. In other words, these rate victims live on less than half the income they received forty two months ago.”
What’s more, income-dependent pensioners face rising food, energy and medical costs.
“Pensioners are caught between declining rates and the rising cost of living,” says Gouws. “In addition, the local rates outlook does not look promising for pensioners, given the expectation that they could remain at current levels well into 2013. On the other hand consumer price inflation is expected to rise during the remainder of 2012.
“To balance their budgets, pensioners need to rethink their investment strategies and review their spending habits.”
To meet long-term income requirements, he says pensioners have to invest in the most appropriate asset classes. Portfolios must produce the highest possible interest and dividend income whilst also enabling their capital to grow. Every case is unique, but Gouws suggests possible strategies for two distinct groups: pensioners who draw less than 6% of their income; and, those who draw 7% and more per annum.
The less than 6% group: These pensioners are “relatively comfortable”, but still threatened by inflation, indicating the need to invest in a portfolio containing assets such as bonds, listed property and equity for capital growth in the medium to long term. “Pensioners who are currently wary of investment markets need to ignore short-term fluctuations and perhaps take additional investment risk to meet longer term investment goals.”
The 7% plus group: Pensioners here need more income than currently provided by interest and dividends. The need for high drawdowns limits the scope for investment risk. They need to invest in interest-bearing instruments with the highest rate of return but which also offers some potential for capital growth to counter inflation.
“One option,” says Gouws, “is an aggressive income type of portfolio that invests in a combination of cash, bonds and listed property. Where fixed deposit investment types are involved, longer fixed investment periods would offer higher interest returns.”
Any investment strategy should be accompanied by a spending review. He warns, “The hardest hit rate victims may have to forgo non-essentials until the economy recovers.”

Copyright © Insurance Times and Investments® Vol:26.1 1st January, 2013
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