Protecting retirement savings from longevity risk

People are expected to live longer at a time when interest rates are at record lows, placing pressure on the level of income that can be derived from interest bearing assets. While returns from growth assets can be volatile, there are strategies available to help secure more certainty in investment outcomes.

Less than 10% of South African savers are estimated to have accumulated enough savings during their working lives to enjoy a comfortable standard of living during retirement.

At the same time, South African life expectancy is increasing, meaning retirement savings need to last for longer. Retirees either need to live on less income or need to work for longer to grow their savings.

There is another option, however, and that is investing in a protected equity strategy that allows investors to harvest higher equity returns without the risk of capital loss.

In South Africa, only about 6% of retirement fund members are likely to retire with a 75% net replacement ratio. This ratio is the level of income that an individual's retirement savings can fund after retirement, expressed as a percentage of their salary immediately prior to retirement. As a rule of thumb, a ratio of at least 75% is considered a reasonable goal.  

The lack of savings has been further devastated by the almost flat returns from the South African equity markets from 2014 until pre-COVID-19 in 2020, which negatively impacts their retirement savings required to generate a post retirement income.

Added to this, South African life expectancy has increased from an average 47 years in the 1950s to 62 years in 2015. Advances in healthcare and technology will continue to contribute to increased life expectancy. In fact, those born after 2014 have a 50% chance of living beyond 100.

One of the major benefits of living for longer is that you have more time to invest in the market allowing for the marvel of compound interest to increase your investment returns.

Equities are one of the strongest hedges against inflation, but they also carry the most risk relative to other asset classes. Investors nearing retirement may not want to be exposed to the risk of equities but may want to earn the returns offered by this asset class.

Investing in protected equity allows you to benefit from equity returns while protecting your capital.

We recognise that the level of risk in a portfolio can vary at different phases of the business cycle. Taking this into account allows us to construct fit for purpose portfolio solutions that are optimised to achieve the best risk adjusted return outcomes for the business cycle. This allows investors to benefit from equity returns that provide a strong hedge against inflation and can extend their potential income longer in their pre and post retirement years.

Ashburton Investments offers a variety of structured solutions that offer a defined level of protection – up to 100%, -- allowing investors to participate in market upside while still protecting your investments from market downside