Marvin Nair | Growth assets key to protecting retirement outcomes from high inflation

According to the South African National Treasury, only 6% of South Africans can retire comfortably, which is already cause for great concern. This situation is exacerbated by the fact that South Africans find it extremely difficult to save the 15% of their income needed for a solid retirement. In addition, preservation when changing jobs is voluntary under the current pension fund system, which leads to less favourable outcomes when these funds are accessed before retirement.  

The impending ‘two-pot’ retirement system, which comes into effect on 1 March 2024, will likely lead to a dramatic increase in the number of people who can afford to retire comfortably. It will allow for limited withdrawals from the ‘savings pot’ for emergencies but no access to the retirement pot savings when changing jobs, guaranteeing the preservation of at least two-thirds of their retirement funds. 

In the meantime, we must contend with and plan around our current reality. Deloitte’s South African Investment Management Outlook 2023 revealed that South Africa’s savings rate is below that of its emerging market peers and is one of the lowest in the world at only 0.5%. Some reasons for our low savings rate are high unemployment, household debt burden and financial pressures to meet immediate needs.  

This scenario does not mean people do not want to save for their future. Retirement planning is a personal journey, and a ‘one size fits all’ investment strategy may erode value and detract from one’s goal. Numerous economic variables increase the cost of living and adversely impact retirement outcomes, and some are beyond our control.  

Beware the erosion of value  

Inflation is one of the variables that hurt retirement outcomes, particularly during sustained periods of high inflation. Inflation is a sustained increase in the general price level of goods and services over time, usually measured over a year. The year on year inflation rate was reported as 6.3% by Stats SA as of May 2023, which is still outside the upper limit of the SA Reserve Bank’s target range of 3% to 6%, and, therefore, can be considered a high inflationary environment. 

Most South Africans have experienced the impact of the current inflation rate, especially when grocery shopping. For example, in 2019, a can of Koo Baked Beans cost around R9.99; today, its average price is roughly R16.99. If the price increases at the current cost of inflation of 6.3%, it will cost you R23.06 in five years. If you put the R16.99 under your mattress and do not have the extra R6.07 in five years, you better develop a taste for a more affordable brand of Baked Beans sooner than later, because your beloved Koo would be too costly to afford.  

This example demonstrates that if your money is not growing or growing at a rate lower than the general increase in the cost of goods and services, it essentially means that your savings are losing value year after year. Effectively your money will be worth less because you can purchase fewer goods and services with the same amount - this can be referred to as ‘erosion of value’.  

While regularly contributing to your nest egg is at the core of any retirement plan, ensuring that your retirement savings and investments grow higher than inflation is also essential. It would thus be best if you were actively engaging with or keeping aware of certain economic factors requiring you to speak to your financial adviser to revisit your investment portfolio and the desired retirement outcomes, since ‘nothing is ever cast in stone’.  

Members of company pension funds are not immune to inflationary risk; fund managers place contributions into low-risk assets to protect the member’s capital as much as possible. However, this comes at a cost, as the expected returns are lower. The growth of the member’s fund interest is nominal.  

Being a pension fund member entitles you to performance updates from the fund and its trustees. These insights will assist you in making decisions on alternative investment vehicles to supplement pension fund returns and provide additional cover to buffer the effects of inflation on your desired retirement outcomes. 

Growth assets are crucial  

Every investor should try and maximise their contributions and returns to have an optimal outcome in retirement. They need to engage with a financial adviser to map out exactly what the retirement planning journey will look like.  

After considering one's contribution rate to your retirement fund, the next retirement strategy is to have a good mix of asset classes to enable the best possible chance of growing retirement and preserving funds sustainably. That would include a focus on equities, properties, and alternative assets, which are generally expected to outperform inflation over the long term. 

Investors can also utilise investment portfolios to mitigate the inflationary risk and ensure that their retirement nest egg is protected from short-term volatility and long-term losses over time. For example, Old Mutual provides clients with the benefit of having the best of both worlds through its smoothed bonus portfolios, which allows the client to have growth asset exposure right up until their retirement date, but with protection against short-term volatility and explicit guarantees, which means clients have desirable risk mitigation built in.  

Retirement daunts many people, but this need not be the case. A few life changes can dispel your anxiety and fears. Firstly, find a reputable financial adviser, map out your retirement goals and how much you will contribute to your retirement fund, consider investment options that align with your plan, start working from a budget, start saving and make the commitment for the long haul. Being proactive in managing your investments will ensure they remain on track to achieve your desired retirement outcome. 

*Marvin Nair is Head of Smoothed Bonus Products at Old Mutual.