Will your retirement savings last as long as you do?

• Retirement may last longer and look very different from the traditional idea of retiring at 60 or 65.
• A retirement annuity or pension fund is a useful tool but having one doesn’t necessarily mean your retirement plan is on track.
• Discretionary investments can add flexibility and access to capital alongside tax-efficient retirement investments.
• Diversifying across markets, asset classes and investment styles can reduce reliance on any single source of returns and help investors stay invested through market cycles.
• Your home forms part of your overall wealth but relying on property alone to fund retirement can leave gaps in your plan.

For generations, retirement had a fairly predictable shape. Work until 60 or 65, and spend the years that followed living off the wealth you had accumulated.

But today, people are living longer and many don’t envisage a hard stop to their working lives. Some may continue working for financial reasons. Others may choose consulting, a second career or work that gives them a sense of purpose.

A retirement that once needed to fund 20 years could now stretch much further. That changes the job your money needs to do.

Episode two of Investec’s Mastering the Basics webinar series discusses why dutifully putting money into your retirement annuity is unlikely to be sufficient, the importance of diversification and what role your property should play in a retirement plan.

“Retirement will look different for many of us than it did for our parents’ generation, or even our grandparents’ generation,” says Darren Behrendt, Head of Investec Invest & Insure.

“When you’ve got a 30- or 40-year retirement versus a traditional 20-year retirement, this is something that needs to be planned for. Building wealth doesn’t stop in the country you live in,” says Behrendt. 

Do I have a retirement product or a retirement plan?

You may have contributed to a pension or provident fund over your working career. Perhaps you have a retirement annuity too. But simply having the products in place doesn’t tell you whether they will fund the retirement you envisage or not.

Inflation, longevity and changes in lifestyle all affect that calculation. So does the investment strategy sitting inside your retirement product.

“Retirement annuities, living annuities, provident funds, pension funds - these are all simply tools. To get a handle on whether your retirement is on track, you must answer some important questions. How does inflation, cost of living, my desired retirement age, and my desired lifestyle at retirement impact my retirement goals?,” explains Kgomotso Motloung, Financial Advisory team leader at Investec.

“We often find that clients will have the retirement product and think they’ve ticked the box. But when we look more closely at what sits within that retirement annuity (RA), we often find that the underlying assets aren’t appropriately aligned with the investor’s goals.”  

A fund suited to a five-year investment horizon, for example, may not be appropriate for money that could remain invested for another 20 or 30 years.

Why build wealth outside my retirement fund?

Tax-efficient retirement investments have an important role, but they come with contribution limits and restrictions on access. Your life, meanwhile, will probably contain financial goals that arrive long before retirement.

That is where discretionary investments can add another dimension.

You might want to help a child with a first-home deposit, fund education or build capital for a future opportunity. You may simply want part of your long-term wealth to remain accessible should your circumstances change.

Discretionary investments can form part of that broader pool of long-term wealth.

“Tax is only one element. You have the ability to add to your portfolio and to continue to build your wealth over and above those specific vehicles,” says Behrendt.

How much belongs in each will depend on your circumstances. For some investors, liquidity may justify holding more in discretionary investments rather than directing every available rand towards retirement vehicles.

Why should I diversify my investments?

Diversification is often explained as a way to spread investment risk. But it can also make the inevitable ups and downs of long-term investing easier to live with.

South African investors today have access to a much wider investment universe than previous generations did. A portfolio can include local and offshore assets, different asset classes and different investment management styles.

That matters because markets don’t move in lockstep. Concentrating your wealth in one market leaves you more exposed to what happens there.

But Behrendt argues that diversification also has a behavioural role. Growth assets can be volatile, and watching the value of a portfolio fall can tempt investors to abandon a long-term strategy at precisely the wrong time.

Diversification can reduce some of those swings. “It allows us to stomach the ride,” he says. “If you don’t stick to it, that’s going to be a big problem.”

Where does my home fit into the picture?

For many South Africans, their home is one of their largest assets. It is also an emotional one, filled with family history, which can make it difficult to view purely through a financial lens.

Motloung argues that property can support a retirement plan but ideally shouldn’t be the “engine” driving it.

Reaching retirement with a paid-off home can reduce one of a household’s biggest fixed expenses. Later in life, downsizing may also release capital or reduce the costs associated with maintaining a larger property.

But a home still represents a concentrated exposure to one asset. Building financial investments alongside it can give your retirement plan other sources of capital and growth.

What happens when life doesn’t follow the plan?

No retirement plan drawn up at the age of 30 will survive unchanged for the next four decades.

Careers change. Families grow. Income rises or falls. Priorities shift. Markets certainly won’t behave as expected every year.

This is why Behrendt describes a retirement plan as a “living plan”.

Automating regular contributions can create discipline, but the strategy still needs to be revisited as your circumstances change.

Motloung suggests one simple test: “When it comes to your retirement plan, is it still fit for purpose?”

That may be a more useful way to think about retirement planning today. Start early, certainly. But don’t spend 40 years faithfully following a plan designed for a life you no longer live.