Saving for retirement in a volatile investment environment

Whether it is your first day of employment or the last month of your working career, deciding on the best investment options for your retirement savings can be a daunting task, even for financially astute investors. The recent volatility of financial markets brought on by the impact of the Coronavirus (COVID-19), oil price wars, trade wars, Eskom debt crunch and looming South African credit downgrade is leaving many members grappling for answers when it comes to securing returns on their long-term savings.

The most important lesson for members is not to panic, but rather to start planning for retirement as soon as possible, remembering to take into account that markets will always encounter volatile periods. You could be hit by a downturn just before you retire, so your retirement plan needs to be sufficiently robust to allow for this. Imagine having to retire at the end of March this year. How would the recent market downturn affect your retirement plans? Would you still be able to secure the retirement income you need?

It has been my privilege to be part of the team analysing the results from our regular Sanlam Benchmark Survey for many years. When considering the responses of members who have achieved a successful retirement outcome, it is clear that they saved with a plan, irrespective of their salary levels. As one pensioner succinctly put it: “Hope is not a plan!”.

A good retirement plan should not only focus on your level of contributions and retirement date, but also selecting an appropriate investment strategy as you approach retirement.

But how does one balance good long term returns with reducing the variability of returns, especially close to retirement?

In the Sanlam Lifestage, our default option close to retirement is a smoothed bonus portfolio. Why? Because this is an excellent way to protect member’s retirement nest egg while still giving good returns. These portfolios pay members through monthly bonus declarations. During strong growth, some returns are set aside, to be paid out during weaker market conditions. Thereby, portfolio returns are smoothed by either releasing investment returns set aside, or by holding them back depending on market conditions. This strategy is typically chosen by either members approaching retirement age or more risk-averse members.

The results below, starting from the period just before the previous market downturn in 2008 to current, shows why this strategy is so popular with members:

These portfolios have continuously shown their worth especially in volatile and uncertain markets, as we are currently experiencing. Over the last three months I have spoken to many concerned members about to retire, who take great comfort that their retirement nest eggs have not reduced due to all the market turmoil.

At Sanlam, we believe that smoothed bonus portfolios remain a relevant and important investment option available to retirement fund members, either as a default option or as an investment for those close to retirement.

ENDS