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Hello and welcome to SAT V's Master Class on retirement income. Today I'm joined by Eugene FAA, head of strategy at Optimum

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Guy Channels general manager at Discovery

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Zaira, executive head of product development at as well as chief clients and distribution officer at M and G Investments. Welcome to you all, gentlemen. Thank you. Thanks so much. So, Zaira, I'm gonna kick off with you. Perhaps we can get a nice introduction to retirement planning in South Africa. How has the landscape evolved locally, And perhaps we can touch on globally as well. And what is the

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importance of retirement planning? OK, so if you look at the retirement landscape in South Africa, I mean, over the last three decades, there's been so much evolution. So previously, retirement funds was primarily defined benefit. OK, so with very little required from a retirement planning point of view because you worked for an employer.

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And, uh, your pension at retirement was essentially guaranteed for life. And then you had the exodus from defined benefit to defined contribution in the nineties, and that was burdened by the calls from from from trade unions. And and it didn't take very long for them to actually understand the the the dangers it actually had for South African society around the risk associated with with defined contribution. Um uh, savings.

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Um, And then, uh, you know, from from early two thousands, um, you've had national treasury at looking at that focus on on a potential solution. And we've had this, uh, this notion of retirement reform coming to the fore again. That's taken quite some time for us to actually, uh, get the wheels going on there. But eventually you've started seeing, um, it introduced step by step. So you had the day, Uh uh, changes that started in in 2015.

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Um, you know, trying to encourage individuals to annuit at retirement. Um, And then, uh, you had the introduction of of other forms of retirement savings tax free savings accounts. And more recently, we've actually got the two pots. So over time, when we've had this shift from defined benefit to defined contribution, financial planning becomes more important in terms of understanding what your your goals and what the the required contribution rates and investment strategies need to meet those goals.

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OK, so, Eugene, perhaps, um, you know, we've We've explained quite a nice. Um, evolution of how, UM, retirement has or the retirement landscape in South Africa has changed. But how does this compare to globally? And then how have individuals retirement savings, um, been affected? Um, over the recent past,

Speaker 0:
I think the important part is especially like you mentioned. Let's just focus on your last part of that question of the evolution locally. And now the owner sits completely on the retiree at the end of the day, not the employer, and they have to take full risk on how will that money actually last long enough? And I think that's exactly like Zaid mentioned. That's why financial planning is so important.

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The bulk of people that actually contribute to these retirement savings pots do not have the financial backing, and they don't always have the necessary skills and knowledge to ensure that there is enough savings for if they do retire and that it lasts long enough because I think there's completely different type of expenses. That retired employee Um um, individuals incur, and that's why it becomes so, so important. And one thing that we've definitely seen in the South African market specifically is a shortage in that space or people

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too high of an amount from that globally. It's also playing a big, big factor, but I think the big differentiator between local and global is globally. In most developed countries. You do have a bit of a safety net in the form of the government so you can fall back on the government. When in South Africa, we don't really have that, especially for your white collar workers. You can't just fall back on that. So the owners completely completely sits on you, and it's important this is not something that you can decide. OK, I'm retiring at 55. Let me start looking at it.

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50. This is something that you have to start planning at a very, very young age, and again it links back to that educational part. I think a lot of people and a lot of investors out there just stick their head in the sand and hope for the best one day. Um, and we've seen that a lot, especially with the withdrawal rates, and I think that's something we need to unpack in a bit more detail of Will that money actually last long enough and understanding that unique needs that you might have, because at the end of the day, you definitely don't want to get to a point. At 55 or

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16, you retire. And you have to completely change your lifestyle because you can't afford to continue with the lifestyle that you've completely become accustomed with the last, let's say, 20 or 30 years. Um, that's actually very close to impossible to do for most people. Um, so that's why it's so important and why the financial advice landscape in South Africa has grown so much globally. We have seen similar type of trends in the US. We have seen some of it in the UK. The Australian market is probably the market that's the closest to us. They do still have a lot of defined

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and, um, benefit plans in those markets. But of course, there, as mentioned, the governments are the backstop. They also want to get those guys off their books. I almost want to say they don't want to sit with potentially looking after these guys and again with the fact that we're getting so much older than we used to and how fast that has actually changed over the last couple of years.

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So you see, the what the Australian government has done very well about 20 plus years actually goes is bringing in what they call the superannuation industry.

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And they put a lot of incentives in place for for people to become members of a superannuation fund or a super, as they call it.

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And over time they've shifted and very successfully, where people started with very, very low, even in the low single digit contributions, they've upped that over time to very high in the in the teens. Um, and over time, I think over 2025 years, they've shifted the industry enormously that people have a big enough pot at the time they get to. As as Eugene said, 55 you you. It's very difficult to solve the problem there because your your options are a lot less

Speaker 1:
and importantly, the The whole thing is you don't have a safety net. So it's it. The idea of shifting from defined benefit to defined contribution was was a very nice idea, and people like that because now I have my own pot of money no one else can take from my pot and the like and it it sounded like and I'm in full control all of the things that we always want

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but what it also took out. There's now no one who subsidises you, Um, and no one who helps you. So when you get into a retirement retirement fund at 22. 25 you need to understand you take full investment risk. From day one, you take full longevity risk, and this is from 25 to 95. This is a 70 year Endeavour. This is a very long term thing that you need to start, right. Um and no one can bail you out later,

Speaker 1:
and we see it in most of our employer funds. And and actually we've got a very good industry in South Africa where the employers help their staff to get into a formal retirement, uh, type of vehicle. But most people just go for the

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the default option at that point, which in many cases is very good. But a 25 year old you know how it is at that stage. You're only thinking about how can I pay off my study debt? How can I get my first car? How can I get out of this old student flat into a proper house and those things take priority above retirement savings. And and the whole challenge of this is the earlier you start the smaller or the changes

Speaker 1:
require to make a material impact. Absolutely. It's like a very long haul flight. If you just change 11 degree your flight path over 20,000 kilometres, it makes a massive

Speaker 0:
difference. Absolutely so perhaps we can open the discussion of these contribution rates in Australia, you mentioned they have gradually been rising over time. What is the landscape looking with regards to contribution rates and from an employer's perspective as well as the employee's perspective? And

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why are we having this challenge of young individuals not starting with their retirement journey? Yeah, well, actually, most of them do start because the landscape is such that you have to. But, uh, what ends up happening is that instead of you, you sort of contributing to a retirement fund. At the same time, you're building up debt and in your mind you think of your retirement fund as your little get out of jail free card five years down the track and when you inevitably change jobs,

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um, up until still today, but it will start changing into the future. You have full access to that money,

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so that money is nominally going into retirement fund, but it's actually not. It's actually, uh, you're spending it out the other door. So So what happens is in their twenties and many times into their thirties. People think that that money, when they get a chance to access it, is a big part. It's really useful. It's a lot of money, but not so much in relation to retiring. Retiring seems like I would need much more. This is obviously not a big component of it.

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What they don't realise is that what you save in the 1st 15 years, if you cash that out, you'll have half of what you would otherwise have had at retirement.

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So that 1st 15 year saving is the difference between earning 10,000 rand in income in retirement or 5000.

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It's absolutely critical, Um, and the kind of category error that employers and those in the pension fund industry have made is to design default and minimum contribution levels for the person who saves from 25 to 65. Precisely No one in their companies does that. And so it is appropriate for precisely no one.

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I mean, they don't recognise that it's incumbent on them to to provide uh, guidance on a contribution rate that is appropriate for someone who say, joined your fund at 35 they've cashed out. They've got nothing. Their trajectory needs to be quite different, but not impossible. If they save at an appropriate rate. At that point, they can still get to the outcome that they that they're looking for.

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So I think there there is a real opportunity in our landscape. All the infrastructure is there, but the opportunity is to to be just It's not really great intelligence, but just a little bit smarter around. Um uh, how to ensure that someone within the strictures of a retirement fund is contributing at a level that's appropriate.

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And, um, uh, we we in our, um, solution designed something to try and do that for people, because what most people don't realise. There's very few good news in this like long term savings thing. The good news is you can start from a pretty low base and do what they've done in Australia, you can start from wherever you at 10% or something. You might need to be at 18%. Nobody can go from 10 to 18 today,

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but most people could go from 10 to 18/8 years or say, by that time, maybe it's 10 to 19/9 years at each salary increase date. If you just shift your trajectory a little bit more or shift your contribution a little bit more, that trajectory gets you to a decent outcome.

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Um, and so there actually are solutions that are doable for people that don't ask too much of them. Um, yeah, so I think that's the opportunity. Thank you very much, guy. So, um, guy mentioned that, you know

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your trajectory will ultimately change depending on a marginal adjustment to your contribution rate. I think that, perhaps to make the reality of retiring with insufficient funds to see one through possibly an extended lifetime,

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that is the importance of financial planners or financial advisors. How important is this and why is it important to get started earlier? It's absolutely critical, I mean, in terms of financial planning. I mean, we're talking about financial planning when it comes to retirement. But, I mean, when it comes to retire,

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I mean, uh, getting your income at retirement is only one element of financial planning. I mean, there's there's, um the income, There's your healthcare needs. There is your bequest motive. There is estate planning, et cetera. I mean, so So a plethora of, of, of, of aspects that actually need to be looked at and financial plan becomes key in terms of ensuring that you've got a plan to achieve a certain outcome. OK, so you need to have that plan, and you need to stick to the plan to achieve certain goals.

Speaker 0:
OK, so then perhaps what are the types of conversations then that advisor would have with a typical clients in their early twenties or mid twenties, right throughout their working life and those few years before, before retirement

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or anyone? Yeah.

Speaker 1:
Look, I, I think those conversations are obviously difficult. But at that age you start with the simple things and and you just wanna get your the investor in the habit of saving. So what is it that you can afford? Um, is it only 10% It needs to be at a much higher percentage. How can we get it there?

Speaker 1:
Make sure you don't ever touch that. Is it in the right fund? Are you taking enough risk? If you're starting at 25 you can only touch that. Money should only think about after 55. That's 30 years. You're not gonna save yourself rich in cash, for example. So

Speaker 1:
the the simple things normally make a very big difference here. And And if we can just help youngsters getting that right, I'm contributing enough. You should be contributing way north of 15% as high as you actually can. We know it's extremely difficult, especially in our economic circumstances. There's lots of other things to buy, like batteries and inverters and all these things. But if if you can just get those small things right,

Speaker 1:
it will have a material impact on your life and and I think is to help them with that behaviour. That's pro, probably the least tangible thing, but it's very important things from day one. Think of it as you will not touch that money ever, Um, and leave that take on the right risk and as you can contribute more, contribute more

Speaker 0:
no, but I think it's so important when Peter just mentioned it's the educational part, especially with the youngsters, because as your your example with the Super Initiation Fund in our even if you start small and just drill it into the youngsters minds like guys, you are going to need this money one day, even if it's one rand now. But it's very tricky to start in your thirties or forties and all of A,

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and you have to contribute 10 or 15% and you've always had access to that type of capital. So it's that educational part, and that's also where the employer can play a big role. But of course, the financial advisor, exactly like Peter says, is more that behavioural coaching and constantly keeping them on the right track. Yeah, absolutely. I want to add the one comment that it's quite hard for a 20 something year old to care

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because that that 65 year old them is a complete stranger to them. Uh, psychologically

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neuroscience is tested. What what's what's your reaction to yourself? At 65 couldn't care less about that person. So to really care about the person is difficult. You've got a challenge in mind. It's not just rationally, it makes sense. But I'd say like financial advisors can do a great service to someone by giving them a vision, a positive vision for what we call retirement. Banish the word and talk about financial freedom. Talk about this idea and it's quite in vogue with where

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Gen. Z is, you know, like, Do you want to have to do something to pull in an income until the day you go to the grave? No. Is that who has that vision for their life? No. Do you want to At some point when you have the most to kind of play for you've got family that you love and would want to spend time with. You've got great skill set that you've built up that you could deploy anywhere. Wouldn't you love to have the freedom to deploy your time in the way that you want?

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And that's what you're saving for is to have that incredible uh, that incredible thing. One other small comment I wanted to make I could make it in a long time if I was given The opportunity is, um is that I think a a critical part of of a savings plan that's often missed is your health and thinking of your health as an asset.

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You talk about life spans increasing, but life span increasing doesn't mean your health Spann increases. Uh, medical science can keep you alive for a long time, at great cost and very uncomfortably.

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Um, and a lot of people get to retire with this vague notion that I'm just gonna keep working and find that either they can't keep working because no one wants to employ them or they physically can't keep working, and it's very expensive for them to live. And so the health that you have at retirement is as important an asset as the money you've saved to be able to pivot if you haven't saved enough or to be able to live the kind of kind of financial, financially free,

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uh, vision of your life that you have. Absolutely. So it's this human capital plus financial capital that makes the total capital right. So as you progress through your your working life, your human capital gets a little bit less, and hopefully your financial capital grows a little bit more. But now we're starting to see people living significantly longer. But how are individuals navigating this longevity risk or advisors rather

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right here. So So in terms, in terms of the longevity risk, I think I think, um, it goes down to, you know, if you the typical individual that that that retires at the age of 60. You know, previously,

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um, the expectation was that you're gonna, you know, live another 10 years, but now you need to live another 20 years, you know, because you are seeing people living a lot longer. So in terms of, um what Financial Advisor the types of conversations financial advisers should be having with individuals is understanding.

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Uh, you know, your your your time Horizon now is like 20 years. OK, so identifying. OK, so what do you need in terms of your basic, uh, cost of living expenses? And what's that gonna unfold in terms of inflation? And you need to and you need to to quantify that for a 20 year period, and that's just to keep your life OK. And then there's gonna be your variable expenses, you know that that, uh, that, uh, that you would need from time to time

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and if you take all of that together for a 20 year period, that's essentially how much you need to have today, OK, to actually retire comfortably. OK, so I think that this expense analysis and this budget thing is quite important. But sorry, Eugene, I'd just like to add, and it just brings it back to the whole medical side again. Because after retirement, that becomes a bigger portion of your overall expenses. And your inflation of that component is also a lot higher than your traditional. So that's why it just comes

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back to why a financial planner can add so much value because you can't just go and say OK, but I'm 50 now. It's only 10% of my expenses. I assume this is gonna be the same rate. And I've even seen financial advisors say completely take out the health care component and growing that at an inflation of between 12 and 15%. Because it's a completely different. I wanna call it animal basically than your traditional living costs, and it

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starts to take up more and more of your overall, um, income again coming back to the educational part and starting from a young age. I think research has shown that 80% of lifetime, um, healthcare expenditure actually occurs after retirement. OK, so, uh, that's a big that. I mean, that's that's actually a big cost. Um, and then in terms of healthcare, inflation, as you mentioned, it doesn't keep up with the price inflation. It's typically 5 to 6% above price inflation.

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So it becomes very difficult to get suitable annuity products that can actually meet up with that. So I think that you raised a very interesting point, as I hear is that the retirement outcome or the retirement landscape or the situation for the client is going to look quite unique to that specific clients. Health situation. Um and how?

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How might this inform the investment? Um, decisions or the the the The advice that the that the advisor gives to the clients are funds separated into a re a healthcare part? Or how do advisors and clients approach investing or saving for retirement? In that sense?

Speaker 1:
Look, uh, II, I do think you they need to think about what is my client's expenditure base. How does their budget look like? And

Speaker 1:
I mean all the research we see is, most people don't have a budget. They don't really think about it. And then you can look at the different components within that budget. And I think they had commented on how important it is to look at this medical piece. Um, and if that is the case, if that piece of your expenses are gonna grow at significantly above inflation, you can't match that. Let's say, with a cash asset that will give you inflation plus one. But you've got inflation plus

Speaker 1:
a 10 12 expense, so you have a complete mismatch. So look, you can get into a lot of detail here, and we won't bore the audience with that. But just think about the different components of your expenditure. The big thing is to make sure that your expenses are in line with what you can afford, Um, and then

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make sure you take enough risk

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effectively to grow your investments way above inflation.

Speaker 1:
The big challenge that we normally see is at retirement. Clients go into a living annuity type investment. They don't want a guaranteed annuity or a guaranteed with increases because they don't think that is enough of an income. So they go into a living annuity with the aim of drawing a higher income to match what they want.

Speaker 1:
But then they they see themselves as a risk averse, So then they actually reduce the risk profile of the investments to inflation plus 2 3 type of scenario. So by definition, you're building an an investment solution that is designed to fail because you draw north of 5%.

Speaker 1:
But you invest in AC P I plus 2 3 type of portfolio. So there's a complete mismatch, and you, you know, your expenses are growing at at least CP I and a big chunk at more. And and I think without going to the details of that, you need to get that balance right. And exactly that's why you need advice. That is, could be a fairly complex scenario if your life is and one's life tend to get a bit more complex as you get to your retirement,

Speaker 1:
Um, kids are in the play, sometimes there, so grandparents in play and and maybe a second spouse and previous kids and and life gets complex, and you need to deal with that and therefore you need a proper financial advisor that can help you navigate that Absolutely

Speaker 0:
critical. Absolutely critical, I think just in explaining that ultimate outcome and potential scenarios that clients might face upon this very important date of retirement.

Speaker 0:
But, guy, um, I'd like to understand, then, um, the various means I know we've spoken about living annuities and perhaps higher drawdown rates that might affect, um uh, individuals, uh, retirement, um, outcomes. But what are the various means that individuals can draw income in retirement? And what are individuals required to do at that date? Um I think, um

Speaker 0:
um, there's a little dodge to that. What they should do at that date is work a little longer, actually. Um, really, as long as you can, you should be working. Maybe not as long as you can. For some people, they've done all the right things. It's OK, but for many people, they should be planning five years prior to retirement setting up their plan B for what happens when the company kicks them out.

Speaker 0:
Um, but OK, at the point where you need to start drawing down on your capital, um, I won't be able to say everything there is to say. That's why, as an advisor, but I like to think of it in a simple rule of three that there's three basic buckets of money that you'll need in retirement. There's expenses you'll have on a monthly basis that are the bare minimum if you envision your life with no joy,

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but you're staying alive.

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Uh, what are those expenses? They'll include your medical aid Premium, Um, rent, food. I mean, it's that kind of thing. Transport,

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Um,

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and that you you're gonna have to spend that as long as you're alive, even if you live for a very long time. Um, so that's an important like, uh, bucket to understand. Then there's all the other stuff. Probably half of your monthly budget is stuff that you want to spend monthly. But really, if push came to shove you, you could do away with,

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um and, uh, and so that is an income stream, but it can be a little bit flexible. Um, if things don't go your way in the investment markets, and then there's money you'll need for emergencies or ad hoc, or what have you that you'd want to be able to access fairly quickly and then with a an advisor, you can sit down and work out what assets match those liabilities. Quite complex terms for people. But liability is just You need to spend something.

Speaker 0:
So there is a perfect, almost perfect matching asset for expenses you need till the day you die. And it's a life annuity, especially if those expenses will grow at inflation. Inflation, plus probably a with profit life annuity.

Speaker 0:
Uh, then a living annuity is a good place to get your income that you want to be steady, uh, but could fluctuate if things go badly, and then you'll need something that is more liquid if you want the luxury. For many people, it will be a luxury of having access to something a little bit short term.

Speaker 0:
That's the way I That's why I'm thinking about my retirement planning. Um, making sure that I I'm kind of aiming to have money in those three buckets at the point that I I need to start drawing down,

Speaker 1:
which is a It's a It's a very good way of thinking of it, and I've seen the analysis, and if you can make sure it also gives you the peace of mind that my bare minimum is covered, and it's covered for life. Whether and and normally the planning is for

Speaker 1:
two people the husband and wife and those expenses. Even if one passes away, it continues, Um, and and they are fantastic products to to solve that problem and many of your others, you can flex up and down. Or you can delay that holiday even if it's by six months

Speaker 1:
or whatever. And that holiday can be a local holiday overseas. It depends on your part and your needs and one type of thing, but and a living in community can help you with that type of thing. Absolutely.

Speaker 0:
I think what I just described is be rational. OK, so for a lot of individuals, their views are, you know, I've worked my entire lifetime. When I do retire, I'm going to go and see the world. I'm going to go into the,

Speaker 0:
you know, the Queen Mary or, uh or, uh, I'm going to upgrade my kitchen. The the important thing is be rational with your with your decisions. And I think that that's also the importance of having a dedicated financial planner. Um, but I think now looking at, um, some of the regulatory changes that are that are taking place. And I think perhaps covid sp it on. I'm not sure I I'm sure some of you can argue with me on that point, but, um, the dreaded Well, no, I wouldn't say the dreaded two pot system, but the proposed two pot system Should we say

Speaker 0:
so. Pre retirees will now have, um, a certain access to a portion of their retirement savings. Is it conditional? And, um, guy, perhaps you can comment on this one. Is it conditional on a certain circumstance or and what are the implications? I mean, there's a compulsory preservation portion, and there's a portion that they may have access to.

Speaker 0:
What are the implications? If they do decide, I'll describe it quite briefly. It's important that advisers understand this well, because they're gonna have to navigate people through what's really complex becomes more complex. It's dreaded only in so far as it's hard for us all to implement it. We actually I think everyone agrees it's a good idea. Um, the change is that at the moment you put all your money into a retirement pot. If it's an R a you can never touch it the retirement new and your personal money. If it's in your employer,

Speaker 0:
every time you change employers, you can just cash it all out. So the rules are are different. What's gonna happen is now any retirement money you're putting away from, uh, the first of March 2024. Only the money from then,

Speaker 0:
um two thirds never touch. Behaves like an R a one third.

Speaker 0:
It's better if it goes to retirement. But actually, at any time, with no conditions, you can take it out. The only condition is you can do that once a year. So they put a once a year kind of once a tax year. Stricture on that. Um, what that effectively is The way to think about that is not as a bonanza. Yeah, I've got a once a year kind of get out of jail. Free card for my debt is to think about

Speaker 0:
the retirement vehicle you were in was gonna get you to retirement with a big lump sum. The rules at retirement are one third you can take in cash. Two thirds. You must buy an income.

Speaker 0:
Now it's just bringing that decision forward to every day of your life essentially. And if you use up that one third

Speaker 0:
on the route, then when you get to retirement that won't be available to you. And, as I said, those three buckets that third bucket of having some money liquid and available and able to kind of compensate for what has or hasn't gone right or wrong in your plan that will be gone. So it's really important that advisors can help keep people's hands to the flame and that. But it does create that access in case people really are in dire straits. And that's the purpose of it.

Speaker 0:
One more really important thing for people advising and chatting to people who are, uh, you know, hear the news, hear a one liner and start, um, running for the hills. Um, is that all the money people have built up up until the date and the investment returns on them? All of your old money

Speaker 0:
is still subject to the same old rules. You can still cash it out if you leave your retirement fund so people shouldn't prior to 1 March 2024 go quickly and try to cash out their money because no one loses any vested rights,

Speaker 1:
so it's actually a three part system. Your existing part is the is the

Speaker 1:
with the rules that stay the same and and it's good to think about it. There's no need to go and cash in there that will. You will have your same rights as you go along. But it does now get a bit more complex, although the idea is to simplify the rules going forward, which I think has been long overdue. And and the overall idea here is if we analyse, what are the biggest issue of why do people not have enough money at retirement

Speaker 1:
and you can pull up all this that has been done over the last 20 years? One of the biggest reasons are non preservation on change of jobs. Um, effectively, you change your jobs. You think it's a good idea. I cash it all in. You pay the tax, you put the money in your bond or whatever the case, buy a new car. That is the biggest reason why people don't have enough at retirement and hopefully this will help solve that problem. It will take a long time because it only applies on

Speaker 1:
all the new money?

Speaker 0:
Absolutely So I think it's quite important then to understand, you know, that people can still cash in on on a certain proportion of their savings that have been that have been, um, saved up until resigning or being made retrenched. But perhaps we can also look at the rate that that actually that decision was actually made. And if the two system, if you believe, um Zahi would be a better outcome than how it's been before,

Speaker 0:
So in terms, in terms of the rules with the with the with the two part system the savings part you will have access to at any point in time so every every year you'll have access to to A to a once off withdrawal, right. But that will be at your marginal tax rate. OK, which currently you would your your retirement fund withdrawals are subject to a different tax regime. OK, um,

Speaker 0:
in in terms of the impact that this is likely to have for individuals.

Speaker 0:
Sorry. Well, III, I actually think where you may be going at it. It would be really interesting to see if

Speaker 0:
once the two part is in, if people will stop cashing out their big lump sum when they change shops because they've had an opportunity to get at a little bit. Yes, but I mean, I think I also think with the intention behind the two pot was to was to get a more balanced type of solution. OK, For majority of South Africans, the only savings that they've got is the retirement fund. OK, so and and we've had, you know, we've had a number of economic shock events over the last

Speaker 0:
15 years and we're just trying to ensure that we've actually got a system which which meets the needs for individuals. Um, you know, throughout their working lifetime, but also after retirement. So I know we mentioned you know, the two pot system, perhaps spurred on by by the pandemic what exactly was observed during the pandemic. And I know that you're going to argue here that the two pot system has got nothing to do with covid. Um, but what was observed, um, during the pandemic did we see, um, you know, retirement funds having to

Speaker 0:
prepare for this huge liquidity outflow with people that were possibly being retrenched and losing, losing their livelihood and needing access to their retirement savings.

Speaker 1:
Look, I think there were a lot of things you mentioned already A few. There were many people that lost their businesses, their incomes. Maybe they didn't have a formal type of retirement.

Speaker 1:
Um, many, many, um, companies were forced to lay off a lot of people which mean they meant they could then cash in that money. And given the fact that no one was hiring at the time, if you didn't have any other cash, you didn't really have the option. You need to cash that to survive. So it was a terrible event for retirement savings, and and there are many different things that happened,

Speaker 1:
Um, and knock on impacts that that happened because of that, Um and and And I guess you will have shocks like this Hopefully not the same type of thing, like over again. But over a 50 60 year of your lifetime, there will be a global financial crisis for different reasons, all sorts of different shocks.

Speaker 1:
Um, and and I guess what this the legislators are trying to do is create a system that is robust enough that it's a very fine line between ensuring you have enough money for one day when you get there and helping you with hardships throughout your life. And it's, uh I mean, we can sit here and criticise as much as we like. It's a very difficult problem to solve. Um, and maybe we wouldn't have come up with a better solution. I

Speaker 0:
think it's I think it's genius, actually,

Speaker 0:
because it really finessed the problem. We're gonna give people access to the cash at retirement.

Speaker 0:
We can just give it now. And it's a bit of jujitsu, actually, because they used there was clamour from the kind of labour space. We need more regular access to retirement money spurred on by what you described during Covid.

Speaker 0:
But they use that to create almost the momentum in the

Speaker 0:
decision making process to put this in place, which gave them compulsory preservation. Yeah, it's a brilliant, brilliant outcome. OK, so perhaps we can look at some of the investment strategies for retirement and Eugene, perhaps I can direct this question to you. Investment strategies, then, when planning for retirement, are then typically unique to each individual's circumstances. Obviously, when they retire, how can individuals then ensure that they optimise their strategy for retirement in the most tax efficient manner.

Speaker 0:
This again where Financial Advisor needs to come and play. Unfortunately, like we've discussed this in depth now, every single individual out there is unique. There's no cookie cutter approach that we can, so but the three of us are more or less the same. This is the investment you should go into. You have to sit with every single investor and exactly see, But what is their tax

Speaker 0:
situation like, Um, do they have other sources of income? Is it more an income issue? Is it more capital issue? It all of that plays a massive, massive role, so it's impossible for me to give one answer. Um, but it's so important to completely understand and again I. I want to link back to what Peter said earlier. Retirees are very risk averse, and that's almost a problem on a certain extent, because they feel that protecting the money,

Speaker 0:
um, by being risk averse. But you have to make that capital grow, especially if you need to live off that capital for 20 plus years, which is very, very possible. Then you have to get growth considerably higher than just inflation. Otherwise, the capital will not last. But that also comes back to the drawdown rate. And especially if you look in the South African market, yes, between 2.5 and 17.5 on average. If correct me, if I'm wrong, it's about it's closer to nine. It's about 8.5, if I remember correctly,

Speaker 0:
and then lots on the 17.5 lots on the 2.5 side, there's different reasons for that. That's a very, very high growth rate you have to achieve to sustain that 9% every single year and then to get capital growth on top of that. So guys that come and say OK, but I need my silver bullet now I need 17%. There is no such thing.

Speaker 0:
Um, preservation is important, but you need to take some risk with that. And that's why it's important again to work with a trusted advisor and an asset manager, build a product to specifically cater for that. Might it be the the the the um um, the bucket approach, where you circle my low risk my more high risk, where you sit with your advisor where it's done in the background with either an asset manager or DFM. The likes. There's different ways of actually

Speaker 0:
approaching this, but it's important to get that balance to get some growth, not take too much risk. Still ensure that the retiree has sustainable capital for the foreseeable future. You know, I agree with you, Eugene. I mean, I think I think that discussion is not just at retirement, but actually much earlier. When it comes to investment strategies, we know that most people would prefer to be in living in people of flexibility. But,

Speaker 0:
you know, living annuity, it needs to last you for at least 20 years. So in your pre retirement investment strategy, you shouldn't be going through a very high high risk to a low risk just prior to retirement to go back into the equity market. It just doesn't make sense. And that's where financial planning actually helps you in terms of that decision. Because, yes, you can take the volatility because, you know, your end game is not age 65 but age 80 So think about the long term. That's sorry. Can I just

Speaker 0:
why it's so important again. Why the financial planning from the start, you have to give all the new information to your advisor all the time. In your twenties, you can take a lot more risk in your thirties forties. You can, but then you have to start rising. But it doesn't make sense to derisk and then jump back into the equity market that just it doesn't make sense. You know, I actually want to bring in this this de risking, um, scenario or Or or or points.

Speaker 0:
There are default options or options available to to individuals of the target date fund to ensure that allocations adjust as a person approaches, approaches. Retirement. How how prevalent are they actually actually put that? And

Speaker 0:
is that is that appropriate for for for situations that clients clients are facing?

Speaker 1:
Um, yeah, I'm I'm probably the worst person to ask on this. I think most of them are AAA terrible idea, except for the portion. If you want to take a portion and match into a guaranteed annuity, which is effectively a long bond asset, if you want to take that

Speaker 1:
from your pre retirement money and glide path to effectively a bond portfolio that is a useful and then buy that guaranteed annuity. But for most people to derisk their pot five years prior to retirement and then just to say no, I now need to take on if they go for a full living annuity. There's no reason why you should do that Recently. I. I did analysis for A for a client

Speaker 1:
that effectively says, if you're a husband and wife, retired at age 60 you're doing planning for as long as at least one is alive. So normally we think on on mortality on single person mortality. But you're working with joint lives here, so there is a 74% probability that at least one will be alive after 30 years. So 60 to 90. So that speaks to a 30 year investment time horizon, a 24% probability that one is alive for 40 years.

Speaker 1:
OK, so let's just stick with the 30 years. So do you want a glide path down to a less risky portfolio? But then, at retirement, you need to structure this to give you an inflation plus income for a minimum of 30 years. Now, go and draw any graph a rolling 30 year or 20 year graph. What is cash bonds versus equities or or growth assets? Do you do not want to be on the conservative side of things? So

Speaker 1:
so again, where I see people make put plans in place that that is sort of designed to fail So they put someone in a glide path or a target at a retirement fund. But there's no intention ever to buy a guaranteed annuity. It's all for a living annuity. So the the plan isn't designed to work. Um,

Speaker 1:
and and they hear that it's Sometimes it's good to manage the maybe the the behaviour of the people, but and it's maybe easier for a trustee because they do risk it. The thing is not gonna bomb now. It may be bomb in 30 years, but I'm not around them. Um, so the important thing is, and and that is the difficult thing. There is a legislative, uh, net around giving advice, which effectively

Speaker 1:
sort of implicitly forces the planner or a trustee to be more conservative, which is which is not great, because you need to take on appropriate investment risk to ensure you get inflation plus growth.

Speaker 1:
Um, and and I guess When you sit with your financial advisor, make sure that they understand it. And when people say I'm conservative by nature, yes, that might be right. That doesn't change the fact that I need proper growth in my living annuity pot, and they need to divorce the two. There's a difference between different needs many people do. One risk needs analysis and say, Right, you're moderate. All your money goes in moderate.

Speaker 1:
I've got very different needs at retirement, as as Guy explained very nicely for us. So your emergency cash pot that should be very close to cash because your time horizon is very, very short.

Speaker 1:
But your money that you're only going to touch in 30 years there you want proper growth assets. So for me, as a single person, you can risk profile me all your like. Those are two very different needs, which requires two very different investment strategies.

Speaker 0:
So, Peter, the risk aversion of individuals changes significantly when they approach retirement as well as at retirement. But perhaps guy um from

Speaker 0:
what are some of the innovative technologies and the new products that have come to market to take into consideration these critical behaviour behavioural changes or emotional biases that individuals, um, experience as they approach approach this important date. Yeah, uh, one maybe builds off what Peter said about target date. We run a target date portfolio mostly used in the retire, the sort of corporate retirement saving space. But it's not trying to derisk you to something low risk at retirement, actually targets.

Speaker 0:
Uh, the idea is it's targeting someone who, at age 75 will move into kind of a low risk, high income strategy. So it's actually pushing up your risk exposure at age 65 versus someone who just thinks, you know, my capital. I'm gonna need my capital now. I'm retiring. I need my capital. You know,

Speaker 0:
um, so that's the one dynamic kind of almost forcing through this internal asset allocation to make sure your your asset, uh, your your kind of risk taking in your asset management solution is longer term than this myopic view at age 65. That's the one thing the other is in the living in nu D space discoveries, you know, always trying to find levers that you can pull to try and help people make better decisions. The one, in the living Innu D space is that,

Speaker 0:
uh, there's a shared value opportunity in people drawing down less rather than more. You know that everyone wants to draw as much as possible. There are many good reasons to do it already. Uh, but we give people extra reasons and in fact kind of, um,

Speaker 0:
reasons that they can appreciate right now to draw less, because as they as they draw less, we can model what that means for the assets of the long term. The asset is gonna be around and grow faster for longer. Um, so we can actually add income from our own pot because we know that their assets will be around longer, uh, part of the whole environment, earning fees, et cetera.

Speaker 0:
So that's an ideal application of shared value. If this person changes their behaviour, it's good for them. Of course, they'll have their income for longer. And we can actually make it doubly good for them because it's gonna be good for us, too, you know, Um, that's that's one example. And actually, one of the things that that's added into that realm just drawing down less, uh, is very rewarding.

Speaker 0:
But then managing your health is equally rewarding because it has the same sort of effect as I mentioned earlier. You know, as you are healthier, you're able to last longer. You need that money for longer, uh, et cetera. Absolutely. So in retirement now, no more income. Now you have to manage what you have to see you through the rest of your life. What options are there for individuals who are

Speaker 0:
post retirement? Um, I mean, if it's not working longer, considering working longer, possibly having Children to to supplement their living space. But what other? How how can they optimise their their retired life? Eugene,

Speaker 0:
that's a very loaded question that you just back there. But again, it comes back to You'll have to sit with that specific client and unpack their exact needs. And there you can look at either living annuities, life annuities or what we've recently seen, especially now, with interest rates being so high. A combination of the two, where your life annuity almost

Speaker 0:
covers as as guys explained your fixed expenses. And you know you're gonna get that for the next 20 or 30 years, at least at inflation and your living annuity can then almost like be an addition over and above that. So that's one option to look at, Um, and again, with interest rates being so high, it is quite popular at the moment.

Speaker 0:
But again, it depends on where we are in the interest rate cycle. How much money do you have? What's your exact needs? Um, are there kids? Are there other options that you can look at? Are there properties you can sell? You have to look at it holistically. It's not just saying, OK, this will work because you need 70%. Or this will work because you need 6% absolutely so very unique to each client.

Speaker 0:
Um, Zaira. But then what determines the ultimate demand? I know we mentioned the blended, um, annuities, but between life and living annuities and what has been the what has been the trend, OK, so I mean, the the the blend between life and living annuity. I mean, that, uh, as Eugene mentioned it, depended on economic conditions. So, you know. So if if it's favourable and looks attractive for for for investors to go into into life annuities, they'll actually,

Speaker 0:
uh, take advantage of that. Um, but also it depends on on various other, uh, other factors. Such as? How much have you saved? Ok, um um what's your required level of income? So what level of risk can you actually take on?

Speaker 0:
Um, And then also, um, what's the impact from A from a tax point of view? OK, so, um, those are the factors which typically, uh, come to play when it comes to the choice between living annuities and life annuities. And then very importantly, it's also understanding what needs you're trying to meet. OK, so, um, if you are, if your needs are to to just to to just meet expenses that go in line with inflation and you're very risk averse, then

Speaker 0:
maybe you want a guaranteed, uh, inflation linked to annuity or if it is going to be healthcare inflation. I think it's going to be very difficult for you to afford an annuity that's going to keep up with health inflation. That's where you'll think. You know, let me get equity exposure to actually make up for that. So it depends on needs affordability, um, as well as, uh, solutions available. I think it was very interesting. Uh, you made the point when you were chatting earlier. Previously is that, um,

Speaker 0:
that level of, um, life annuity versus living annuity has been about 20% but less than 20% in life. Annuities? Historically, yes. And with bond yields, where they are now at about 40 which is quite a dramatic shift just based on the kind of

Speaker 0:
perceived value of a life annuity. Yeah, I think from an investor point of view as well as from a financial point, uh, planner point of view, there's, um there's more of an understanding of the of the value of of life annuities. You know, it's not just an insured product. It's actually,

Speaker 0:
um, you know, it actually is able to to to manage risk a lot better for the individual, but also helps the financial planners life a lot easier in terms of trying to explain the market volatility from time to time. Yeah, absolutely.

Speaker 1:
And the important thing that that you mentioned is the the price of these things aren't static. So just like in your living annuity, the expected return based on current valuations are very different from time to time.

Speaker 1:
What you price your life. Annuities are not typically long bond yields, and and those differ dramatically today, long bond yields are 6% real equity like returns. That is, uh, probably sort of a once in a lifetime type of experience if you can lock in a guaranteed income increasing and inflation at those type of yields. For you to beat that in a living annuity is a very, very difficult task, with 100% certainty. So

Speaker 1:
so important for financial plan is when they develop. What do I do with my retiring clients? They can't have a static answer. A. Your client clients are very different, but the environment is also very different, and you need to use those tools because this is a difficult problem. Let's face it, the typical client ending up in an advisor's office at 60 or 65 generally hasn't got enough money. We've seen all the surveys out there, all the research,

Speaker 1:
So this is already an extremely difficult problem you're trying to solve here. You need all the help you can get and all the tools you

Speaker 0:
can get. Absolutely. So, Peter, something interesting that you mentioned there is that obviously the the life annuity is passed off of the off of the bond yield, so sometimes a blended option might have a higher allocation into life versus living Or Or Or Or Uh,

Speaker 0:
I'd just like to unpack that a little bit more just to get a good understanding. Eugene, if you could perhaps comment there well, it's exactly like Peter said at the moment. Life annuity actually offer The highest I've seen currently is about 8.5% so that's that's very high. It's like Peter said, this is We haven't seen such high interest rates in South Africa in a very long time, and it's directly related to where the bond yields are.

Speaker 0:
What should that weight be between the two again? It depends if you can live off that 8.5% with inflation and especially, I'm come come back to to Guy's example of your fixed portion. At least you could put a lot of bigger portion in the life annuity, so there's definitely validity in that, too. But that weight again really, really depends.

Speaker 0:
Then you can even say I'm the living annuity. I can take a lot more risk and potentially only draw 2.5% and then decide later down the line. When I do need the capital, let's Derisk or whatever the case might be, um, so it really depends and I'm gonna go back to March 2020 when the market dropped as much as it did. You can't exit the market at that point, so that is a time we'll have

Speaker 0:
to sit with the financial advisor and the financial advisor. Need to tell you, Listen here, OK, we're gonna let's see what happens in 3 to 6 months time and let's see how this plays out. There was guys that entered the market at that point and they grew their portfolios to 2030%. They were super lucky, but again, it comes back to the market environment we find ourselves because we can sit here now and I can come up with.

Speaker 0:
I don't want to say the perfect plan because I don't think there is such a thing as a but a solid plan. At least we'll sit here in two weeks time and it will look completely different because who knows what would happen to the currency? The equity market? World War three, Who knows? There's just so many different variables that you constantly have to take into account. But

Speaker 0:
yes, we are seeing a larger allocation to to life annuities. 8.5% is relatively high. We are moving in a lower growth environment globally, not just in South Africa. Yes, South Africa has got its own unique issues, but I think it's very important. Investors, even advisors, will get this. Sometimes the economy, the political landscape and the investment lands two very different things. It's two very, very different things, and you have to split that emotional part of it, too.

Speaker 0:
Um, yeah, absolutely. So it seems as though there's a whole lot of a plethora of different ways that life annuity. You know, living annuity is blended all sorts of different products and exciting products. Sometimes when it comes to, um, individuals, unique, unique circumstances.

Speaker 0:
Um, I know that we have mentioned that there are new, uh, innovative products that are coming to market. But guy, what is what is your outlook with with regards to how, um, retirement planning and retirement income and the products that come to market will evolve?

Speaker 0:
Yeah, it's interesting. Hey, II, I think it's, um

Speaker 0:
it's

Speaker 0:
possible to try and put more, um,

Speaker 0:
support into the hands of individuals as they approach retirement, especially around this kind of almost robo advice type stuff you can put in the pockets of people. We've done some of that with our, uh, employer sponsored retirement vehicle because you've got, you know, 300 employees, most of them will never see a financial advisor.

Speaker 0:
Um, and you can actually give quite a high degree of of financial assistance by just decision treating them doing complex calculations that only a really good financial advisor could do. And it would they would charge you a fortune to do it, put it in their pockets.

Speaker 0:
Um, and I think that with technology where it's at and people's experiences of digital, that kind of thing is gonna you're gonna see more of it. I don't think it's a threat to the advice world because and I've seen this in reality Now, with what we've put out there, what that creates is it takes a whole bunch of work away from an advisor who is, does have an advised client in that group. They go and sit with them with the tool a bunch of their work is already done and they help the person to make the decisions.

Speaker 0:
So that thing of understanding a person's personal circumstances and adjusting what the advice is,

Speaker 0:
and then the behavioural dynamic helping this person to do what the right thing is, that is where the you you can never take that away from the power of a financial adviser. And actually, that's where most people go wrong is not doing the thing that if they just Googled, what should I do on the road to retirement? They get the six answers, but they need someone to motivate them and and deal with their behavioural, uh, kind of biases along the route. You know, I mean so as you mentioned, majority

Speaker 0:
of retirees would never actually see a financial advisor, you know, because it may may not make financial sense for the financial advisor because typical a financial advisor, you know, I'd rather deal with a individual which is save 10 million rand than dealing with 100 individuals that have saved 300,000 rand, you know, from a from an economy of scale

Speaker 0:
perspective. OK, so what we are seeing is the masses don't typically engage with financial advisors. So you are seeing, uh, things such as robo advice, benefit counselling coming to the fore. OK, and actually, it's It's giving individuals more guidance in terms of the decisions that that they should make and what we are also seeing from a,

Speaker 0:
uh, retirement fund point of view the introduction of the default regulations. You know, we are utilising the purchasing power of the retirement fund to ensure that products are made available to members. Um, and that's actually the the the more the blue collar workers that are able to access suitable products at retirement at a much cheaper cost. Yeah, yeah,

Speaker 1:
absolutely. I think it's important to

Speaker 1:
where the technology I think comes into play is if we can use technology in the places where it matters most. So IE earlier in your journey way before you get to retirement, if we can use technology to help there, and I think the other thing that plays a massive impact is human behaviour or the client's behaviour, and we've seen in various years different industries how technology is used to change behaviour,

Speaker 1:
so if you can have some kind of app on your phone and their credits and different plays, and we see game theory and game play involve to manipulate human behaviour. It's a massive industry and computer games how they've worked out to ensure you spend more time on their machine,

Speaker 1:
um, than anything else or YouTube or Netflix these things more time spending time in front of of of the screen. So if we can use that technology to influence client behaviour to ensure they do the right things earlier and steer them away from the pitfalls that will have a material impact, we can also apply technology way at the end. But then your options are more limited. Um, use it where the

Speaker 1:
opportunity set as big as OK,

Speaker 0:
thank you so much. So, um, Eugene and I know we've spoken about, um, artificial intelligence and how the role that technology plays in in the the provision of financial advice as well as retirement benefit counselling for the for the lower income workers. But what is your outlook and I just to close up this session? What is your outlook for how, um, retirement planning and retirement income

Speaker 0:
and will be over the next decade? But II, I have to link what you said earlier, too. And it's so important because we've we've all seen and experienced advisers in South Africa. They don't want to look at these small guys. And we constantly we focused all like, yes, in your twenties. You have to start saving. You have to start looking at that. But unfortunately, the advisors are very quick to say, Just do this, just do. They don't want to spend time with this low

Speaker 0:
margin business, I almost want to say, But that's where technology can play a very, very big role in those those guys planning over the long term, because they can then put in their own variables and say, But this is my salary now, some sort of retirement tool and they can say And maybe there should be something that pops

Speaker 0:
warning, warning. You're not gonna have enough money and scare them to a certain extent, and it should be incorporated in. Like you said Social media. I almost wanna say Tiktok, probably now I don't know how that will work, but I feel that's that's the route that the 20 years something guys are going.

Speaker 0:
But they can definitely educate themselves to a certain extent, too even if they do sit with a financial advisor, then. But they are a lot more comfortable with that journey, and they can control that journey a lot more. Unfortunately, robo advice hasn't has exploded as much as anyone thought it would. And what we've seen is yes, People use it, but they still go to financial advise, and no one just lies on what comes from robo advice at the end of the day. But again, it comes back, and I know I sound like a stuck record.

Speaker 0:
And if if they, like Peter said, if they get, I'm gonna use the word scared rather, if you scare them enough, they might be like, OK, this is not something I can just ignore and just stick my head into the sand. And that's where technology can really help from a very, very young age, because again, we all work in the financial services industry. But the bulk of the clients that we cater for do not. They are not comfortable with this this environment, they're not comfortable with this landscape. They don't

Speaker 0:
understand the repercussions. They don't understand that you can't You can't wait until you're 40 or 50 They don't understand that they just like. But the money comes in. Doesn't it just continue like that for the rest of my life? Yeah. So I think, you know, behavioural models and artificial intelligence and all the technology that that comes with all of the progression in planning for retirement and ensuring that sufficient money is is then saved for for that for that very important stage of everyone's life.

Speaker 0:
I want to thank each and every one of you for sharing your insights into this master class and retirement income. We appreciate your time. Thank you so much.