As we wind up 2011, Simon Pearse, CEO of Marriott Asset Management, offers his suggestions for New Year’s resolutions for retirees.
2011 has been a difficult year for retirees: South African interest rates have remained at their lowest levels in over 30 years; equity markets have been weak, especially in the face of the euro-zone crisis; inflation has begun to creep upwards making funding a lifestyle ever more difficult.
We have compiled a list of New Year’s resolutions to help retirees navigate the challenges of staying afloat in stormy waters.
1. Preserve your capital. Investors with a living annuity may draw up to 17.5% of their capital each year, to maintain their lifestyles. However, if they opt for too much income now, they risk eroding their capital over time and possibly even wiping it out. By preserving capital, investors will be able to provide for their retirement for longer periods. So we recommend that retirees restrict their income to the level of income being produced by the selected investments.
While investors may find it challenging to do this, it is far preferable than finding that one’s capital has been completely (or even partially) eroded. Rather be conservative now, than risk having to find another source of income (such as going back to work) or having to reduce one’s standard of living at some point in the future.
2. Expect higher inflation. Although we have seen inflation ticking up through 2011, it has to some extent been masked by the strength of the rand which has kept imported inflation at bay, particularly rising food and fuel prices. We believe that inflation is likely to average at least 7% over the next decade, and possibly be higher.
In such and environment, for current income an investor needs to determine the required income level and then acquire a blend of cash, bonds, real estate and equities which will generate the required income – cash, bonds and real estate providing a reliable high income – equities, enabling the income to grow. Crucially, the choice of equities should include only those which generate a reliable, growing income stream.
For future income requirements, an investor’s portfolio choice is one that aims to accumulate capital and grow the capital value. This can be achieved by a combination of reinvesting income, which accumulates more capital and income growth which renders the capital more valuable.
3. Don’t pay more tax than you need to. When planning for future income requirements by maximising capital accumulation and capital value growth, the blend of investments should be influenced by income tax considerations as well as an investor’s risk tolerance. Where income reinvested is tax freei.e. retirement annuities, preservation funds and living annuities, the portfolio should be biased toward higher yielding (lower risk) investments like income funds which generate interest and rental income. However, where income is taxable, the portfolio should be biased toward higher income growth investments like equity funds which generally produce tax free dividends (the higher risk).
4. Don’t panic. Monitoring the price of your investments every day is not constructive rather monitor the income that is being produced by those investments as more can be known about the income produced by theinvestment than the reason for short term capital volatility.