finweek

Structuring your investments in the run-up to retirement

Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)
Schalk Louw is a portfolio manager at PSG Wealth. (Picture: Supplied)

Sometimes one is declared medically unfit. Or you might lose your job. 

But in most cases, retirement is a choice – and ideally one for which you need to plan at least five years in advance.

There are three practical tips to use while structuring your investments during the last five years prior to retirement:

1.“Time is wastin’, time is walkin’.”

Rock band, Hootie and the Blowfish said it best in their 1995 hit, “Time”, when they asked why time punishes us and why time walks away. 

Time is the one commodity that we cannot get back. 

But if you use the time prior to your retirement wisely, you can save yourself from a lot of sleepless nights. 

Wealth Manager at PSG Wealth Old Oak, Rita Louw says part of her holistic planning process involves restructuring client’s investments/portfolios “so that they can generate more income as we move closer towards retirement”. 

This is usually done through focusing on money market and bond investments, as well as high-dividend-yielding shares. 

It creates a feeling of calmness closer to retirement, because clients can start to see its income generating ability and, more importantly, less volatility. 

But Louw also warns against overdoing it. 

She warns that emotions often tend to get the upper hand during times like the last five years – where growth in local investments has been very limited. 

In order to keep up with, for example, inflation in medical costs and food in the long run, growth investments remain crucial. 

2. Active, not passive

This is a big decision and maybe not the easiest time to make it. 

You want to squeeze maximum growth out of your investments, because you want optimal growth of capital – which will ultimately supply you with an income. 

Let’s suggest that an investor had invested all of their capital in a fund that is fully invested in shares in May 2008, one year before their retirement (for this example, I will only be using the FTSE/JSE All Share Index), in an attempt to have as much capital available at retirement as possible. 

At that point, they decided on an annual withdrawal rate of 5%. 

If they retired in May 2009, after the JSE lost 26% of its value, and they withdrew an income of 5% (escalating by a 6% inflation rate annually), they would have had to wait until August 2012 to see the same balance as in May 2008. 

If they had invested in an average South African Multi Asset High Equity fund (sector average – balanced fund) in May 2008, they still would have experienced a drop of 15% in their investment value. 

But with the same income requirement, they would have been able to see a recovery in their investment balance to the same level as at May 2008, as early as February 2010.

3. High-dividend-yielding shares don’t have to mean less growth

As I mentioned before, at this stage it is important to structure your investments in such a way that they can provide you with an increasing income in the future. 

I am told quite often that high-dividend-yielding shares will not be able to provide sufficient growth over the long term. 

But when we examine the data, it becomes clear that this is not the case. 

Over the past ten years (30 June 2009 to 30 June 2019), the JSE delivered an average annual dividend yield (DY) of 2.83%. The FTSE/JSE Dividend Plus Index (Divi), delivered an annual DY of 4.69% over the same period. 

The Divi is made up of 30 shares that have the best 12-month expected dividend yield. 

In comparing these figures alone, clearly the “limited growth” theory is unfounded. 

When we look at these two indices’ growth over the same period, the Divi index, with growth of 15.1%, managed to outperform the JSE with its growth of 10.27% quite comfortably, and was less volatile than the JSE.

I am not saying that you should put everything you’ve got into high-dividend-yielding shares, but don’t be afraid to include them in your total portfolio, especially not in those last few years before you retire.

Schalk Louw is a portfolio manager at PSG Wealth.

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