Three risks you face
As a pensioner, there are three important risks you must think about when considering how to use your Fund savings at retirement, namely:
Investment risk
Investment risk refers to the chance that the investment return you earn on money that you invest at your retirement is too low to provide a reasonable income throughout your retirement.
Investment risk depends largely on the asset classes (e.g. shares, bonds or cash) in which you invest your money, and your investment time horizon.
Inflation risk
One of the big risks you face in retirement is that inflation reduces the buying power of your pension.
It is very difficult to predict the future course of inflation. It is therefore important that you invest your retirement money, or at least the part which covers your basic needs, in such a way that your income goes up each year more or less in line with inflation.
The following chart shows how the buying power of R100 declines over each of the next 20 years if average future inflation is 5% p.a., 10% p.a, and 15% p.a.
Clearly, future inflation is a significant risk to your standard of living during retirement.
Risk of living too long
This seems like a strange risk - but the longer you and your dependants live, the more money you will need while you are on pension.
Many people have a pessimistic view of how much longer they will live once they retire. The following table shows how long, on average, a male and female are expected to live if they retire at different ages.
| Retirement age | Male life expectancy | Female life expectancy |
|---|---|---|
| 50 | 28 years | 33 years |
| 55 | 23 years | 29 years |
| 60 | 19 years | 24 years |
| 65 | 16 years | 20 years |
| 70 | 13 years | 16 years |
Thinking about your “Basic Needs” and “Good-to-have” (luxury) needs
In meeting your Basic Needs, we suggest that you should aim to protect yourself against the three key risks: inflation, poor investment growth, and the risk of living too long. Ideally you would want a pension that:
- Is guaranteed to meet your basic needs (and those of your dependants) each year;
- Will increase each year in line with inflation; and
- Will be paid for the rest of your lifetime and that of your spouse or dependants.
On the other hand, in meeting your "good to have" needs, you can consider taking on more risk. Ideally, you would structure your investments with the following in mind:
- You would be prepared to take on more investment risk, provided that there is a good chance that you will be compensated for this risk. Importantly, you must be able to live with the “regret” that you may feel if the investment returns turn out to be poor.
- You have a longer-term investment time horizon, and if the investment does poorly in any year it does not matter much, because you don't need the money to cover your basic needs.
Legal Disclaimer
The information contained in this guide does not constitute advice by the Board of Trustees or by its advisors. If you need more information on how you can invest your retirement benefit, you should seek professional advice from a licensed financial advisor.