What does inflation mean for your clients retirement

By: Farzana Botha, Segment Solutions Manager at Sanlam Savings

Inflation is hitting historical highs globally, with South Africa no exception as we hit a 13-year high in June last year. Combined with rising interest rates and volatile markets, those on the brink of retirement may face difficult decisions. As a financial adviser, now’s the time to help your clients make savvy choices to bolster their resilience for the long-term. When times are tough, it may be hard to stay the course. But this is when it matters most.

Farzana Botha, Segment Solutions Manager at Sanlam Savings, says, “We need to talk more about the impact a high-inflation environment has on people’s retirement – especially in a nation where only 6% of people can currently retire comfortably. Many will be affected – especially those seeking to materialise their savings soon, but also any person aspiring to grow their retirement investment in the current market.

For clients about to retire:

For clients earning a market-linked return, the concern is that they may be materialising their losses if they ‘cash out’ their savings. Inflation can’t be avoided, but you can help off-set some of its impact by:

1. Reviewing your client’s plans. Are they still on track with their goals? If not, they may need to consider key actions such as:

• Adding more disposable income to their fund;
• Delaying a fund’s maturity;
• Deciding how much income they can live off (if a fund is maturing) without exceeding the maximum withdrawal and depleting capital during a period of bad market conditions.

1. Seeking sources of capital protection, such as a smooth bonus fund. The Satrix Smooth Growth Fund enables clients to invest in high-growth assets during market downturns, due to monthly declared bonuses. When the market does well, a portion of the return is held in reserve to smooth out losses during volatile periods.
2. Delaying retirement or continuing with part-time work.
3. Reducing costs where possible. It’s important for clients to pursue some of their lifelong goals – like travelling – but it’s critical to plan for this. They should also consider ways to curb some of the biggest costs, like downsizing their home.
4. Maximising tax efficiencies. Consider a tax-free savings vehicle to supplement retirement funding, so they can withdraw tax free money to spend, rather than relying on their retirement annuity for a cash lump sum.

For those with longer retirement horizons:

Botha suggests spending time helping these clients to visualise the kind of retirement they want, then discussing realistic ways to achieve this. “Based on the current market movements, their timeline and goals, as their adviser you can indicate if this is the best fund right now.”

“It’s also important to explore offshore options to hedge against currency risk. If the rand performs poorly, but the dollar is doing well, having money offshore enables clients to reap the benefits of the strong dollar. The Sanlam Global Wealth Builder lets you diversify across geographies, with opportunities to invest in the ‘giants’ in the international investment arena, protecting against local performance.

“Encourage your clients to increase their premiums if possible, even by a small amount. When the markets are down, it’s often a good time to buy units at a lower price. Consider having multiple retirement annuities that mature at different times, for a ‘phased’ retirement approach. A combination of life and living annuities may be optimal; a life annuity provides a set income for life, whereas a living annuity is held in the name of an annuitant, from which an income can be flexibly withdrawn. Retirement doesn’t have to be one big scary goal; it could be many micro milestones instead.

“Most importantly, help them to stay the course. Exiting when the markets are bad is never a good idea – the only time you experience a loss is when you move. An Olympic gymnast once said that there were countless times she wanted to quit over the years, but her parents always said she couldn’t make that decision on a bad day, only on a good one. The same principle applies.”

Botha concludes, “With South Africa’s ‘two pot’ retirement system on the horizon – which will give people access to a portion of their pension savings once a year – it’s crucial for advisers to help their clients make educated choices so that they can live with confidence knowing their financial future is secure.”

To earn CPD, click on the February 2023 edition link below: https://www.learnon.co.za/course/index.php?categoryid=112