A Fin24 reader set to retire in August noticed a drop in his approximate investment value from R1 million to R600 000. He seeks the advice of an expert on whether to leave the investment as it or to reinvest the money.
We are about to retire in August. My investment's approximate value was set for R1 million when we retire. Now, with the advent of coronavirus, I see the value decreased within the last two months. If the value at my retirement date is R600 000 (in August) will this be the amount that I can get to invest further, or if I leave it, will it devalue even further beyond my retirement date?
Lauren Davids, Senior Investment Consultant at 10X Investments, responds:
Thank you for your question. In my response, I have assumed that you are not a member of the GEPF (the Government employee Pension Fund).
I am sorry to hear that your investment did not achieve its projected value at retirement. As most sensibly-diversified investment portfolios have all but recovered the losses they suffered in March at the onset of the global Covid-19 pandemic, your shortfall in August is unlikely to relate to this.
Future market returns are unknown, so projected investment outcomes or illustrative policy values are typically based on what a similar portfolio would have earned, on average, over the stipulated investment term.
The actual return will, invariably, be higher or lower than the projected or illustrative return. The problem is that even a 1% p.a. difference, compounded over many years, can lead to a big deviation from the projected outcome.
It may also be that the projected outcome was based on a different portfolio (for example, a high equity portfolio) rather than what you ultimately chose (eg one with low exposure to the share market). Maybe your projections did not take the impact of annual fees into account (which, in some cases, can be as high 2% or 3% p.a.).
Given these potential pitfalls, it is important for everyone to revisit their retirement plan regularly, to see whether it is on track to achieve the stated goal or projected outcome. If not, one can take corrective action, for example by offsetting a lower realised return by saving more, or moving service provider to reduce the fees you pay.
Although you are retiring in August, your retirement savings will stay invested as before until you give notice to your service provider (typically the fund administrator) that you wish to retire from the fund.
The amount you can invest post-retirement is set only once you retire from your fund. At that point, you have options as to what you want to do with your savings. Depending on the type of fund you are invested in, you can take all or some as cash, and you can invest the balance in either a guaranteed or a living annuity (or a split between the two). There may be tax consequences if you choose to take your retirement fund as a cash lump sum.
If you choose a living annuity, your money remains invested. As a newly retired person you will still effectively be a long-term investor with many years ahead of you. You will want your savings to earn a good return after retirement too, and not to pay too much of it away in fees. Do some research, compare your product with others and make sure you are getting the best deal.
Questions may be edited for brevity and clarity.
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