WeeklySA_AdminSURGE: Things to get worse as recent geopolitical events affect energy prices, pointing to growing inflationary pressures…
By Isaac Moledi
Strange financial times, such as the current rising interest rates and inflation, can further complicate the transition to retirement, something market experts say can be tricky at best of times.
In theory, inflation and interest rates are in an “inverse” relationship. This means that when rates are low, inflation tends to rise and when rates are high, inflation tends to fall.
Market experts have already cautioned about the hiking circle of interest rates and have warned consumers to think of taking their retirement when the “music stops” as a further 100 basis points in hikes is expected this year.
“Challenges for the economy include the consumer price inflation (CPI) which, although unchanged, remains at the upper target range while the rand has come under pressure,” said a recent statement from Seeff.
Announcing the rationale behind last month 50 basis points hike in interest rate, the South African Reserve Bank Governor Lesetja Kganyago said the decision was due to a combination of short-term factors, as well as the flooding in KwaZulu-Natal, including the continued electricity supply constraints.
The trend of rising global producer prices and food price inflation in recent months was also expected to continue on the back of the Russian-Ukraine war, which Kganyago said was likely to persist for the rest of 2022. He added that “higher than expected inflation has pushed major central banks to accelerate the normalisation of global policy rates, tightening global financial conditions”.
Discussing a few factors those approaching retirement will want to consider, Andre Tuck of 10X Investments believes that these financial times are out of joint. “The wealth explosion in recent years has been at odds with the economic reality on the ground.”
Tuck says while financial markets partied on, drunk on too much liquidity and negative real interest rates, the real world grappled with the fall-out from Covid containment measures: millions of people losing their livelihood, entire economic sectors obliterated, supply and labour constraints and record debt levels.
“What cursed spite for those born at the wrong time, who have to set the retirement affairs right during the hangover period that will surely follow. They would have seen their investment accounts balloon during this phase, fueling a sense of complacency about their retirement prospects.
“But the dramatic inflation surge and the resultant urgency to ratchet up interest rates, is killing the mood. And it may get worse as recent geopolitical events, especially as they affect energy prices, point to growing inflationary pressures.”
According to Tuck, the retirement transition is precarious at the best of times.”You have to make some hard decisions, and probably live with the consequences for the rest of your life. You risk locking yourself into a strategy or a product that may not suit in a few years’ time.”
He warns that should you choose a guaranteed annuity you are stuck with the one you choose. “A living annuity comes with more flexibility, but also the risk that your investment and draw-down strategy will not serve you later,” he cautions.
Then there is timing risk, because what happens in the markets ahead of this period could still scupper one’s plans. “Retirement is when your savings are near their peak, which means the impact of any volatility is most pronounced, in absolute terms.”
To mitigate this risk, Tuck advises investors to invest with their time horizon in mind. “Timing risk is a bigger threat for those buying a guaranteed annuity, as their investment term is short. You need to start de-risking and preserving your savings a few years ahead. That means gradually lowering your exposure to equities and investing more in bonds and cash. Cash should hold its nominal value while you are hedged against falling bond prices as these translate into lower annuity prices.”
Alternatively, those choosing a living annuity might want to invest conservatively, for more stable returns. But Tuck says this won’t provide the above-inflation growth needed to make savings last over an extended retirement.
According to Tuck, investing in a well-diversified high-equity portfolio in South Africa has historically delivered superior returns over periods of five years and longer. So, this strategy should make your savings last longer and/or afford you a higher draw-down.
It’s a double whammy for retirees, he says, adding that higher inflation ratchets up living costs, while steadily rising interest rates may result in some years of negative investment returns, as happened during the mid-Seventies.
“In such an environment, you may lose your nerve, and switch either to a guaranteed annuity, or to a defensive portfolio. This would mean locking in your losses and a lower income for life. But even if you do not change your strategy, you may lock in some losses as drawing income makes you a forced seller in a bear market.”
“People in or approaching retirement should perhaps revisit their lifestyle expectations and moderate their spending plans, on the assumption that their portfolio, even if it is well-diversified, may give back some of the gains of the last three years,” Tuck says.
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