Читать книгу Secure Your Retirement - Брюс Кэмерон - Страница 8
WHAT PENSIONERS MUST DO
ОглавлениеSouth Africa’s pensioners need to take steps now if they are going to ward off the various crises they currently face. The most important thing you have to avoid as a pensioner is your financial ‘point of ruin’, where you start running out of money at an accelerating rate. This is more critical than ever for South Africans as we navigate the effects of the COVID-19 pandemic and the legacy of the Jacob Zuma administration.
Retirees must look carefully at their finances. In particular, they must urgently review the following aspects of their situation:
The way their pensions are structured to provide a safe and secure income into the future. Retirees must place their own future first, not that of their beneficiaries.
The flow of their budgets, in order to cut out spending on what is a want rather than a need.
Other sources of income, such as a job if possible, and/or speaking to family members and friends for assistance. It is better to speak now rather than when matters are out of hand.
Possible ways to reduce their expenses, such as for their housing and transport. For example, relying on Uber might be a sensible option.
The well-being of their and their partners’ finances before factoring in any beneficiaries.
It isn’t that the theft of public money is new. It was already under way going back decades, probably deep into the apartheid years. But it seems to have stepped up a notch with the corruption of the 1999 arms deal, and then let loose massively when, at the 2009 election of Jacob Zuma, the words on his supporters’ lips were ‘Now it is our time to eat’. And eat they did, leading to the virtual collapse of the municipal system of government, the provincial system and the administration of national government, to say nothing about Eskom and South African Airways and other utilities.
This kleptocratic attack did not just lead to massive corruption. It has also resulted in the part or whole destruction of many public institutions. The South African Revenue Service was not the only one: there have been others far worse affected.
The socio-economic impact of the COVID-19 pandemic is going to be enormous. The worldwide lockdown in 2020 has added a financial challenge that never followed other recent crises, such as the 2007–2010 subprime mortgage crisis in America, which also had a global impact. Nothing like this has had such a wide-ranging effect on individual wealth, from employment and savings to pensionable income.
Retirees are among the worst affected by the COVID-19 pandemic. This is most notable in two ways:
the greater mortality rate of older citizens due to the COVID-19 crisis; and
the financial consequences of maintaining the sustainability of their pensionable income during sudden downturns in investment markets, even though many have recovered somewhat, and the long-term effects of the COVID-19 pandemic. It must be remembered that most South African private pensioners have already retired on too little money. This will be a serious body blow to many.
Then add to this the effects of the kleptocratic Zuma regime. One of the main reasons for the rand to have fallen and to have stayed down against the main international currencies is Zuma – not the COVID-19 pandemic.
Normally one would say to most investors, including pensioners: ‘Wait it out.’ Unfortunately, you cannot wait for the crisis to pass this time around. The future is going to be different, but we still don’t know how different it will be. Investment markets are going to be volatile, employment is going to be different, and some businesses will flourish while others will die.
In a macabre way, state pension schemes may benefit because of the effect of the elderly being more at risk, meaning less will be paid out in pensions, easing the pressure, particularly in European countries where state pension schemes are becoming unaffordable because of longevity.
One of the advantages of market dips when you are building up savings on a regular basis is that you are able to buy assets cheaply that will gain value as markets improve again. But when you retire and live on an income based on your retirement savings, it’s very different. When you are drawing down an income, you are reducing your capital at a far greater rate when investment markets collapse. And the longer they stay down, or even remain level, the worse off you will be.
It is important to remember that pensioners are facing the greatest dangers. And 90 percent of all pensioners choose a living-annuity vehicle rather than a traditional life assurance guaranteed annuity.
Let’s say that today, no matter how long you have been retired, you have retirement capital of R6 million. You are drawing down 7 percent of your capital a year, giving you R35 000 a month before tax. (Be warned: at an average drawdown rate of 7 percent, pensioners are already in trouble, but that is the reality of how things are in South Africa.)
The market then crashes by 20 percent, reducing your capital to R4.8 million. You stick to your R35 000 a month (R420 000 a year), because you can’t afford to live on less and you can only change the income levels on your annual anniversary date.
These tables will give you an example of what happens to your drawdown percentage if you stick to the same rand drawdown level. By year eight you are in trouble.
Table 1.1: End of year one
Investment value | Per month | Per year | Drawdown % | ||
Start value | R6 000 000 | R35 000 | R420 000 | 7% | |
Market decline | –20% | –R1 200 000 | |||
Drawdown | –7% | –R420 000 | |||
New value | R4 380 000 | R35 000 | R420 000 | ||
Inflation rate | –5% | –R300 000 | |||
New totals | R4 080 000 | R35 000 | R420 000 |
Table 1.2: End of year two
Investment value | Per month | Per year | Drawdown % | ||
Start value | R4 080 000 | R35 000 | R420 000 | 10.29% | |
Market improvement | 10% | R408 000 | |||
Drawdown | –10.29% | –R420 000 | |||
New value | R4 068 000 | ||||
Inflation rate | –5% | –R204 000 | |||
New totals | R3 864 000 |
Table 1.3: End of year three
Investment value | Per month | Per year | Drawdown % | ||
Start value | R3 864 000 | R35 000 | R420 000 | 10.87% | |
Market improvement | 5% | R193 200 | |||
Drawdown | –10.87% | –R420 000 | |||
New value | R3 637 200 | ||||
Inflation rate | –5% | –R193 200 | |||
New totals | R3 444 000 |
At this point, the market improvement is generously provided at 8.5 percent a year (inflation + 3.5 percent growth).
Here is what happens at the end of year eight:
Table 1.4: End of year eight
Investment value | Per month | Per year | Drawdown % | ||
Start value | R2 181 793 | R35 000 | R420 000 | 17.5% | |
Market improvement | 8.5% | R185 452 | |||
Drawdown | –17.5% | –R381 814 | |||
New value | R1 985 432 | ||||
Inflation rate | –5% | –R109 090 | |||
New totals | R1 876 342 |
In year eight, you reached your maximum drawdown of 17.5 percent. This is called the point of ruin, where your income will drop in real terms – and that is before inflation. In buying terms, because of inflation, your buying power would have reduced a few years earlier. Now you can see why it is called the point of ruin.
The problem with the COVID-19 pandemic is that you will never know when investment markets will recover in the longer term. For example, in nominal terms without inflation, the New York Stock Exchange took until 1952 to recover from the Great Depression of 1929, and the Japanese Nikkei stock market, whose index reached the dizzy height of 30 000 in 1992 before dropping to about 12 000, is still nowhere near that mark 29 years later.
With the SA Reserve Bank predicting a GDP rate of negative 7 percent for the year, the current market and the rand’s poor trajectory are hardly likely to see reversals during such a volatile time. Predictions are that the world average GDP growth will be negative 6 percent.
The effects are likely to be devastating for the South African economy. Tax collections are going to be dramatically down, and the government will have new debts to pay because of money it has borrowed to try to sustain the economy during the lockdown. So, with more to pay out and less money available to do so, we need to watch out for another debt downgrade.
Around the world, we are seeing a far wider reach of problems related to COVID-19 than we did with the 2007–2010 property meltdown. Unlike then, however, we now have almost every industry involved, particularly in countries that are in virtual lockdown. For example, in 2008, shops, theatres and restaurants stayed open, and people were allowed to travel, but this is not the case with the COVID-19 crisis. Investment markets will be more volatile and take longer to recover this time as well.
And it is not only the COVID-19 pandemic. We have the Saudi Arabian and Russian fuel war, which has already shrunk the oil price internationally and hit Sasol, a major contributor to the South African economy, reducing its share price by 95 percent in the first days of our national lockdown.