Question

I recently turned 65 and besides my pension, I have R3m invested in various funds, some of which are overseas.  When does one start moving money into totally safe funds like fixed deposits and money market?

Answer

There are a couple of factors that you need to consider when realigning your portfolio when you retire.

Longevity

We are living longer than our parents’ generation and it is likely that one in 10 of us will live to 100.  This means that you can be on pension for 35 years. 

If as a 65 year old, you can you look back on the changes in your life from the time you turned 30:

• How your income stream changed with the various promotions and salary increases you received.
• The political and economic changes crises you lived through – the years of high inflation as well as those of recession.

You can appreciate that you need to invest your assets correctly in order to cope with a similar set of changes over the next 35 years.

Pension inflation

Pensioner inflation is a lot higher than the normal inflation rate.  Medical costs, for example, make up a very high percentage of a pensioner’s budget.  As you may have seen with last year’s medical aid increases, these are a lot higher than the normal inflation rate let alone any increase in a pension.

It is therefore important that you have savings that you can access to supplement any shortfalls in the future.  This is where choosing the right investment portfolio comes in.

Investment portfolio

I regularly come across retirees who retired with an excellent pension and are struggling to make ends meet.  This usually happens after they have been on pension for 10 years and the impact of pensioner inflation is really being felt. 

One of the biggest causes of this problem is that the retirees have invested their funds into portfolios that have not beaten pension inflation because there are too conservative.  The rationale is that this is their only capital and that they cannot risk losing it.

An investment principle that I’d like to highlight is volatility and time frames.  This is the likelihood of an investment going up or down over a period. 

Over the course of a year, a bank deposit would have a very low volatility and interest rates would typically only change if there was a change in the repo rate. 

An equity portfolio, on the other hand, would have a much higher volatility as the price would change on a daily basis. However, as you increase the timeframe of looking at the changes in the value of the portfolio, you will notice that the volatility gets less and less and the growth is smoother.  Once you hit five years, there are very few equity portfolios that would produce a negative return.

So, to answer your question as to how much money you should have in a totally safe fund, you would need to determine how much money you are likely to need over the next 12 months and then put that into the bank or the money market.  For the rest, I would recommend that you consult a financial planner who can help you select portfolios which are likely to beat pension inflation over the longer term.