For each additional year you expect to live in retirement you need to accumulate approximately 5% more capital, says Andrew Davison, Head of Institutional Asset Consulting at Acsis. That means if you exceed todays average life expectancy by a decade, y
This frightening statistic emerged during a discussion on generational attitudes to saving and investment that took place at the 4th annual African Cup of Investment Management conference ( http://bit.ly/u34ZLJ ) in Cape Town last week. The conference was sponsored by Sanlam Investment Management.
The focus of the panel discussion was on South African savers in the 20 to 30 age group a sub-set of the so-called Millennial Generation or Generation Y. Davison sketched a perfect storm for South Africa’s young savers. They will have to take on higher risks to generate higher returns something that goes against their often conservative investment outlooks while battling the twin evils of a low-return environment and unemployment. They also face longevity risks.
The panel observed that while a simple balance sheet approach to retirement planning remained sensible, it was difficult to calculate liabilities (a savers needs) and match these with investment strategies for a date four or five decades into the future.
More thought will have to go into the assets that Generation Ys invest in at retirement and financial planners will have to consider investments with longer maturities because high returns in assets of limited duration will prove meaningless.
Generation Y is the market segment that will generate future incomes for the retirement industry. The younger generation is more independent and more confident when making investment decisions, says Willem le Roux, Investment Consultant and Actuary at Simeka Consultants & Actuaries, but they also tend to invest more conservatively, which suggests a bit of a discrepancy. He adds that the industry’s obligation to young savers goes beyond suitable products to educating and guiding them at each step on the savings journey.
We encourage employers to step up the game in terms of educating consumers, says Le Roux. Employers stepped away from the process during the shift from defined benefit to defined contribution, but it is time for them to get involved again. The employer, through its HR department, is often the first point of contact for retirement advice.
Many asset managers and advisers educate their clients through member workshops where it is clearly communicated to them that they cannot view their pension fund as a guaranteed path to retirement. They need to take ownership and make decisions with regards to the fund and put away extra depending on their requirements.
But many of these workshops are not attended by younger fund members. Baby Boomers (born between 1946 and 1964) who expect to retire at age 65 typically take an interest in their retirement at age 35 to 40. If the Generation Ys intend working forever or at least into their late sixties the danger is they will only take an interest in their retirement after age 50.
Another issue is how to model retirement for someone who might live to 100. Sean Smith from Liability-Driven Investment Services at RisCura, says you should consider your retirement goals ensuring a decent income through retirement until your death and then allocate assets to meet the goal.
When you look at your modelling you need to allow for the mortality improvement by building in say a 1% improvement in mortality per year, says Le Roux. He adds that young savers can afford to take greater risks and might consider Regulation 28-compliant balanced aggressive portfolios to ensure a mix of active management and passive exposure.
As they approach retirement they should factor in annuity rate risk what an insurer will charge for my monthly income and perhaps hedge against interest rate risks, he says.
The panel agreed that Generation Ys should contribute as much as they can to their retirement savings as soon as possible: for someone contributing a fixed percentage of their salary for life, the first contribution is the most valuable as investment returns tend to outstrip salary increases over time.
It is important for trustees to pay careful attention to the choices they offer fund members, says Davison. The mere fact that a 5% contribution is offered as an option makes people think it is an acceptable choice. An acceptable retirement fund contribution is nearer 15%.
If you contribute R1 000 per month over 10 years and generate inflation plus 5% – and your twin brother starts saving after 10 years with a contribution of R2 000 per month for 20 years, his investment will never catch up with yours.
Smith adds that while retirement age and the level of contribution are important, the biggest threat to Generation Y savers is the high turnover rate in jobs. Skipping from one job to the next and cashing out your accumulated pension pot each time could undo all your savings efforts. It is imperative that you preserve your accumulated retirement savings.
14 September 2013
By Willem le Roux, Investment Consultant and Actuary