All South African retirement fund members received some good news in February 2023, when the tax-free portion of the lump sum retirement benefit was increased from R500 000 to R550 000. After the excitement of the increased payment died down, the reality of what to do with the “extra money” kicked in. By Brett Ladouce
We feel like the dog chasing the bus (trying to save enough for retirement), who finally catches the bus (reach retirement age) and must now learn how to drive the bus (manage our retirement savings effectively to ensure that all our financial needs are met for the rest of our lives).
Before deciding on how to invest your R550 000, or whatever amount you decide to take as a lump sum retirement benefit, you must first determine your short-, medium- and long-term financial goals after retirement. The best way forward would be to split your money between various investments (asset classes) according to your goals and when you will need access to your money.
Short-term goals are those for which you will need immediate access to the money in the next 12 months. This will be, for example, the money you would need to pay for that planned holiday you want to take to celebrate your retirement or for unplanned or unforeseen medical or household expenses. Bank deposits and money market funds offer almost instant access to your money and almost zero chance of capital losses over the investment period, but the investment returns that you can earn on these investments can be relatively low compared to the investment returns you can obtain from other asset classes.
In the balancing act between access to your money when needed, capital protection and investment return, investment performance takes a back seat against access and capital protection.
Medium-term goals are those for which you will need access to your money in the next two to five years, for example, for the purchase of a new car or minor renovations to your house. Low equity unit trusts and government retail savings bonds are good investment options for your medium-term goals because there is relatively low probability of suffering capital losses over the investment period of two to five years.
Long-term goals are those for which you would need access to your funds in the next five to 10 years. The goals will include, for example, your future medical expenses or major maintenance expenses at your house. High equity unit trusts or other equity market-related investments such as shares in companies might provide the best investment returns over longer investment periods.
However, you must keep in mind that the prospect of higher long-term investment returns might come at the cost of short-term losses or investment under-performance over the short term. The relatively long investment period will give you the opportunity to maximise your investment growth and make up for any short-term losses you might suffer.
Your investment options and terms should match your financial needs and money should be available and accessible when you need it in future. It does not make sense to invest the full lump sum retirement benefit in an investment vehicle where you can only access your money five years from now if you want to spoil yourself with an overseas holiday in the first six months after your retirement date. The future availability of money must be balanced with the need to obtain the highest possible (after inflation) investment return by taking the appropriate level of investment risk.
The best results will be achieved by seeking advice from a financial adviser who will be able to guide you in the right direction to select the most appropriate investment products for your specific future needs.
The table below provides an example of the potential investment returns that you can achieve if you allocate about 20% of your lump sum benefit to your short-term investment goals, 30% to medium-term investment goals and about 50% to long-term investment goals:
Ladouce is a pension funds lawyer and the author of Pension Funds for Palookas.
PERSONAL FINANCE