Gregoire Theron, Chief Investment Officer at GraySwan
Today, South African savers are confronted by a host of challenges that previous generations did not have to think much about. Increasing longevity means that retirement savings will need to stretch further than ever before.
Yet, the financial turmoil that has followed the pandemic and, more recently Russia’s invasion of Ukraine, have wreaked havoc on global markets. As such, the savings pool is shrinking further still.
An indication of this can be found in the latest statistics from the Association of Savings and Investment for South Africa (ASISA), which show a 5.3% decline in the value of total assets held by life offices and collective investment schemes or unit trust sector over the first six months of 2022. This reflects both a reduction in the number of risk policies bought, as well as an increase in the number of lapsed policies, compared to the same period the year before – no doubt a reflection of the harsh economic environment.
It is not surprising then, that uncertainty prevails, as people contend with extended inflation, an increased cost of living, little to no wage increases in over two years, and worse still, a consistently high unemployment rate.
However, as more South Africans move from savings mode towards survival, they are putting themselves at greater risk of being unable to retire in the years to come. This places advisors in an increasingly important position to ensure clients do not lose sight of their longer-term savings goals. By revisiting clients’ financial plans, substantial care and consideration will be needed – and possibly some brutal honesty.
But the facts remain the same: It is critical to manage client expectations without sugarcoating their reality, with a view to instill confidence, as well as provide a practical path towards improving their material retirement outcomes.
At GraySwan, we have identified three key areas to zero in on when creating or reviewing clients’ retirement plans during times of uncertainty.
Insurance technology with a difference.
The end-to-end insurance platform that puts your customers first.
Get better at budgeting
While some salaried employees are forced into saving for retirement by way of their monthly pension fund contribution, many others who work for themselves or lack retirement benefits simply do not account for retirement savings in their monthly budget, even more so when times are tight. And in the future, even those salaried pension and provident fund members may be tempted to withdraw some of their retirement savings prematurely, as per National Treasury’s proposed two-pot retirement system, which will allow members to make annual lump sum withdrawals of up to one-third of their total retirement savings. With this in mind, make sure you assess or reassess clients’ current financial situations so that they understand clearly how much they need to put away each month in order to receive sufficient income to cover their essential expenses when they retire.
Invest wisely
With over 1,500 registered unit trusts in the South African investment market, it can be intimidating for investors to select the best products that target their income requirements for retirement. However, having reviewed your clients’ financial plans, advisors will be in a better position to select long-term investment options that fit their individual time horizons and risk profiles. As part of this process, be sure to educate them of relevant tax-free retirement savings vehicles that are available.
Focus on fees
While fees should always be an important consideration, in times of sluggish economic growth and high inflation, it is even more essential for investors to recognise the correlation between performance and fees, so as to prevent fees from eating into their returns. Do your homework and share fee structures and fund fact sheets with your clients to help give a transparent, simplified view of their options, so that they can make informed decisions based on both investment costs and profit potential.
With inflation looking to continue for the short to medium-term and a possible global recession on the cards, the only thing that is certain about the current investment climate is that there is more uncertainty on the way.
By reviewing clients’ financial plans regularly, advisors should be able to impart greater confidence to stay invested for the long-term, as they journey toward their well-deserved retirement.