The current bear market has highlighted the need for investors to review their investments on a regular basis - and in particular their retirement plans, according to Raymond Berelowitz. Berelowitz, an actuary and the head of product for Fairbairn Capital, Old Mutual's retail investment arm, spoke at a recent meeting of the Personal Finance/Fairbairn Capital Investors Club in Cape Town.
Poor markets wiped out about 43 percent of the average American household's retirement savings in the year-and-a-half to the end of 2001. Assuming long-term investment patterns are repeated, this loss could take about 30 years of investing to be recovered. But the markets in 2002 didn't help, Raymond Berelowitz says.
In foreign currency terms, over the year to the end of 2002, the United States equity market, as measured by the S&P 500 index, lost 23 percent of its value; the UK equity market, as measured by the FTSE100, was down 25 percent; the German equity market, as measured by the DAX, was down 40 percent; the Japanese equity market, as measured by the Nikkei, was down 20 percent; the French equity market, as measured by the CAC, was down 33 percent; and the local market, as measured by the JSE All Share index, was down 11 percent, Berelowitz says.
Reality bites, he says, and this is why you should regularly check if your retirement plan is still on track. The state of the markets is a key factor for most people who are saving for retirement, because in South Africa, as in the US, many companies have moved their employees from defined benefit retirement funds to defined contribution retirement funds.
Defined benefit funds guarantee you a pension, typically related to your years of service and your salary, at retirement. But in defined contribution funds your retirement capital is built up through contributions by you and your employer - and by returns from the investment of these contributions. What has accumulated by retirement date is what you have for your retirement. In other words, the investment risk is transferred to you, the employee. You need, therefore, to ensure that your capital grows and is not decimated by bear markets.
In addition to keeping an eye on the state of the markets, as a member of a defined contribution fund or someone who is funding their own retirement, you must consider the risk of outliving your capital. With improved nutrition and advances in medicine, people are living longer. In the US 18 percent of men who reach the age of 65 are expected to live beyond the age of 90, while 31 percent of women who reach 65 are also expected to make it to 90 years, Berelowitz says.
In South Africa, statistics show that men who had reached the age of 60 in 1983 were expected to live another 18.5 years. Men reaching 60 this year can be expected to live on average another 22.5 years and those having their 60th birthday in 2023 will live on average for 25 more years.
Although you may be comforted to know that you could live that long, if you are in a defined contribution fund or you have funded your own retirement, you must make sure that at retirement you have a big enough lump sum to last you until you die.
Berelowitz says South Africans should consider the high medical and food inflation rate in this country, the high debt levels and the increase in the number of non-permanent workers for whom there is no employer-sponsored retirement provision.
In the light of the recent poor markets and the other risks you face, you need to take a look at your retirement plans, particularly if you are less than five years from retirement, to see if your retirement strategies are still appropriate and how realistic your expectations are, Berelowitz says.
He suggests asking a good financial adviser to help you consider both your assets and your liabilities. Regarding your assets, he says, you should play out different scenarios - for example, if the bear market continues, if the market moves sideways, or if the market picks up. You should then also consider what your liabilities would be if you followed all your dreams, or if you settled for a middle-of-the-road existence or if you lived only a bare-bones existence.
One way to increase your assets and reduce your liabilities is to work longer, Berelowitz says. Working longer not only helps you to save more, but means you need to save less, because you are reducing the number of years during which you will be retired and dependent on your savings. You might supplement your retirement income if your spouse works, if you convert a hobby into an income stream, or if you use your experience to lecture or consult.
Don't make these mistakes
People who are still many years from retirement should consider the mistakes that other people make and which result in them not having enough money at retirement.
- Typically, when people leave their first job, they cash in their retirement fund and regard it as money to burn on the many things they need. Young married people who change jobs often use their retirement fund money to buy a house or go on an expensive holiday. It is only when people settle down and have families that they give a thought to buying risk cover and saving cautiously. Only when their children have left home and they are approaching retirement, do they start to panic about their retirement savings.
Berelowitz says although it is never too late to start your planning for retirement, starting early is much more effective. If you start saving early in your life, you will enjoy the effect of compound interest. For example, if you save R2 000 a year for just six years from the age of 22 and then stop, you will accumulate the same capital (assuming 12 percent growth per year) by the age of 60 as would someone who saves R2 000 for 33 years from the age of 28 until they are 60. This is because the money you put away at a young age earns interest, which in turn earns more interest and so compounds.
Other things you should do are:
- Get financially literate - read the financial press, take a basic financial course and fill in your own tax return. If you know what you pay in tax, you are more likely to do something about implementing tax savings.
- Build a relationship with a skilled financial adviser.
- Consider smart investments and legal structures such as trusts.
- Understand the risks of inflation.
- Save by reducing your current consumption to preserve for your future consumption.