About 100 years ago, people lived to the average age of 30. Nowadays, an ever-greater number of people are reaching their 100th birthday. Thanks to advances in health care technology over the past century, the worlds population has experienced a marked increase in longevity, and while it is rather unnerving to think of ones own mortality, most of us underestimate the investment horizon that needs to be planned for in retirement. Many studies have been done to determine how much and how long we need to save to ensure a sustainable income in life post-retirement.
Most of the research indicates that the prudent approach would be to plan for at least 25 to 30 years. While there are various factors such as inflation, withdrawal rate, level of initial capital, how long your capital will last as well as investment returns that influence the level of income you can draw in retirement, another important factor is the sequence in which retired investors earn their returns.
Weve seen a great deal of volatility in equities with the stock market reaching record single-day losses. If youre invested for the long term and youre years away from drawing from the money you have invested, you might not be too worried about short-term declines in performance. The smartest thing you can probably do right now is leave your investments, sit back and wait for things to stabilise. However, for investors who need to draw on their investments regularly, like those with living annuities, volatility becomes important.
The best way to think about this is if the value of your retirement savings declines near the outset of drawing an income, the amount withdrawn will represent a bigger portion of your investment than if you had experienced growth over the same period. The impact of this is that the base continues to decline with each additional income withdrawal leaving less savings to grow.
This could result in retirement savings running out much sooner than if the portfolio experienced positive returns at the start of the withdrawal period. The past few years have been difficult for investors, particularly those with exposure to the SA equity market as in many cases returns have been dismal. This means that many pensioners are now drawing an income in excess of the return of their investment, resulting in capital erosion.
The risk involved in withdrawing money from a volatile portfolio, termed sequence-of-return-risk, is lower when portfolio volatility is lower. The current market capitulation has highlighted the value of having the right mix of portfolios in reducing this type of risk without compromising too much on longer-term growth.
The 36ONE hedge funds can produce positive returns in both rising and falling equity markets (due to their combination of long and short positions) and therefore have the ability to produce asymmetrical returns, which is especially valuable in times of heightened uncertainty. Allocating a portion of your savings to the 36ONE hedge funds can help control the impact of market volatility on a portfolio and could be one way to reduce sequence-of-return risk.
For example: a client has a lump sum of R2m and decides to invest. He invests R1m in the 36ONE SNN QI Hedge Fund and R1m in the FTSE/JSE all share index at the start of April 2006 (the launch date of the 36ONE SNN QI Hedge Fund). The table below summarises what his investment portfolio would be worth on March 31 2020 in nominal terms:
Scenario 1: Lump sum scenario
Excerpt from:
Withdrawing assets in a down market is one of the biggest risks to portfolio longevity - Business Day
Recommendation and review posted by G. Smith
