The 4 things threatening your retirement savings in South Africa – and how to stop them

Extreme market volatility and uncertainty have been a wake-up call for people with retirement savings – and it is best to be prepared for another possible disruption, says Tanita Conradie, a certified financial planner at Brenthurst Wealth Management in Pretoria.

Conradie said that global factors that affect the economy, such as Russia’s invasion of Ukraine and the Covid-19 pandemic, are extreme examples of risks affecting retirees – with little that can be done to stop them.

She noted, however, that are different risks posed to South Africa’s retirees, and there are some ways to mitigate them. The risks include:

Longevity risk

As a result of medical and biotech advances that combat disease and allow us to live longer, it is now necessary for retirees to be able to sustain their savings for a longer time period, said Conradie.

She said it is now a possibility that you could outlive your savings.

“This is a significant challenge if your retirement assumptions have not accounted for a revised retirement age and life expectancy.”

According to the World Bank, the average life expectancy in South Africa has risen from less than 49 years in 1960 to 64 years in 2019. CNBC also reports that longevity is the biggest financial risk we face.

To combat this, you can choose a life annuity instead of a living annuity when retiring.

“The former is a sensible option if you are concerned that you will outlive your retirement savings because a life annuity provides you with a guaranteed monthly income for life,” said Conradie.

The life annuity, however, does have some drawbacks pay – specifically that your heirs will not receive a lump sum out should you die earlier than anticipated, she added.

Conradie suggests that prospective retirees consider this option but, invest the bulk of their savings in the life annuity, with a portion in alternative instruments to provide them with some liquidity.

Expected and unexpected expenses

As much as we would like to believe that life gets simpler during retirement, the reality is that life s hurdles and speed bumps do not simply disappear. As such, unexpected expenses for emergencies should be anticipated and catered for, and so too inevitable costs associated with healthcare and elderly care, said Conradie.

“You can avoid unnecessary financial stress by maintaining an emergency savings fund for unexpected emergencies.”

She added that the best protection against the possibility of serious health scares is to take out a risk policy, ideally in one’s younger years, to cover critical illness for the extent of their life.

Another form of protection one could consider is medical aid gap cover that helps pay for medical expenses not covered by your medical plan, she said.

Family commitments

Circumstances could likely arise when you have to make sacrifices to assist a love one during a crisis.

Conradie said that the best way to be prepared for such occasions is to have risk and life insurance for yourself and your family alongside a succession plan that helps to remove many uncertainties.

One of the most important steps is to draft a will so that your family’s future is not determined by outside parties and rules as dictated by the Intestate Succession Act, said Conradie.

“Without a valid will, all assets in your estate are frozen and winding up your estate could take months to be finalised, leaving your family financially stranded. All it takes to avoid this is to draw up a legal will.”

Market risk

In the same way that life expectancy is rising, we also know that markets will continue to rise and fall over time. If you are in or close to retirement, then time is the one luxury you do not really have and, therefore, you face greater risk from market dips.

Retiring during a bear market is far from ideal, especially if your portfolio is heavily weighted toward listed equities or other asset classes which are currently under pressure, said Comradie.

“You can reduce your risk to some degree by obtaining impartial advice from a financial advisor on the best way forward.”

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