Simply put, investing when you’re 20 and investing when you’re 45 are two completely different ball games. It’s good to know that, increasingly, retirement funds are taking this into account and offering members a “life-stage” investment option, which takes into account both age and time to retirement.
According to Roger Birt, head of Guaranteed Investment Portfolios at Old Mutual Corporate, one of the most important factors to bear in mind is risk appetite. Do you take on more risk when you’re young and focus on low-risk assets to ensure a good monthly income after retirement? Consider what your financial needs will be after you’ve retired before you make a decision.
“A proper life-staging model will cater for both young and old members by providing suitable portfolios for both accumulation in the years before retirement and preservation after retirement,” Birt advises. Often, little thought is given to a person’s risk profile after retirement, but when you choose a post-retirement vehicle this should be kept in mind.
Birt says that people who want cash at retirement might want to avoid losses on capital from risky investments, like the stock market, as they get closer to retirement. Another option would be investment products that guarantee capital and returns declared as bonuses, since these products behave like cash from a protection perspective, but improve prospects for higher returns depending on the nature of markets.
People who opt for a life annuity will want protection from interest-rate movements as retirement approaches, says Birt. A life annuity pays a guaranteed income until death, and the price paid for a life annuity depends heavily on interest rates and bond yields. Any drastic yield change close to retirement could have a dramatic impact on the level of income secured for life.
At the other extreme, there are members who opt for a living annuity at retirement.
“With a living annuity, the individual decides on the level of income they need to draw down every year from an investment fund based on their risk appetite. In contrast to life annuities, these members take on the risk of potentially running out of their savings pool before death. As such, taking on some investment risk to increase the likelihood of favourable returns on those investments over a reasonable time frame is a consideration,” Birt says.
These members will probably place less value on completely avoiding stock market losses, as recoveries in losses after retirement are fairly likely for them. Riskier investments are likely to be considered, although these members might still want their return each year to at least meet the minimum living annuity drawdown rate of 2,5%.
Birt stresses that life-staging should be a priority for defined contribution funds. “In contrast to a defined benefit fund, where the employer carries the risk, the member carries the full risk under a defined contribution structure. Members of these funds therefore need to place significant importance on investment management and ensure that their trustees provide them with a range of solutions to cater for a wide spectrum of needs,” Birt cautions.