World events affect the value of retirement savings

The war between Russia and Ukraine has impacted trade and financial markets throughout the world. Many countries, including South Africa, rely on both these countries for the import and export of goods and resources. The world’s response to the war - putting severe sanctions in place against Russia - has also had a negative impact on the availability and price of goods and resources. One of the impacts that most of us have personally felt is the increase in the price of petrol. This affects our transport costs and the price of any goods that need to be transported or involve transport. This has resulted in a lot of uncertainty about the future.

Fontanella Head of Technical Marketing – Alexander Forbes Investments

These events and the way people feel about them have also affected economies around the world. Economies are not expected to grow as fast or, in some cases, they may even shrink.

Inflation and interest rates are expected to increase. This environment is generally negative for investments and financial markets, which means that investment values have been decreasing recently. This has also affected the value of retirement savings Unfortunately we expect this financial instability to continue for some time.

During the Covid-19 pandemic, we shared information about dealing with uncertainty and coping in tough times. We want to use this opportunity to remind you of the important messages we shared during that time.

Financial markets go through cycles – they rise and fall. When one market cycle is finished, the next one begins. During your working years while you are saving your hard-earned money, you will experience a few market cycles.

Past recoveries and opportunities

Although financial markets have recently decreased in value along with your savings, as you continue saving for retirement you’ll be buying investments at cheaper prices. In the case of shares, for example, portfolio managers can get more shares than they could before the crisis for the same amount of money. Because financial markets tend to recover, this can benefit you over time.

Being diversified

Retirement fund regulations require your savings to be diversified. This means your savings are invested in diffferent types of investments and the amount in each investment is limited to protect your savings.

During the last few months, most types of investments have decreased in value at the same time. It can be concerning to see the value of your retirement savings decrease.

Remember the two important things about the investments that retirement savings are invested in:

We expect the value of investments to grow over longer periods of time.

Over shorter periods of time, the value of investments can go down.

During April 2020, we shared information about the shock to financial markets that resulted from the Covid-19 pandemic. Just over two years later, we’re experiencing another financial market shock with a different cause. Financial market shocks have happened in the past and are expected to happen from time to time. This is the reason that retirement fund regulations require your savings to be diversified. Sometimes financial market shocks negatively affect your savings, even if your investments are diversified. However, being invested in different types of investments can help absorb the shock of events affecting the economy and their impact on your savings and investments.

Our investment team at Alexforbes has examined nine financial market shocks from the energy crisis in 1969/1970 to the Covid-19 pandemic in 2020. In all of the cases we reviewed, except for two, the one-year return after the crash exceeded the losses during the crash. What we wanted to help answer is what happened to people’s investments during these times.

If you had R100 invested in the market1 at the time of these crises, your investment would have fallen to R662 After one year, your investment value would have increased to R103 on average and after three years, R191. In all cases, investments would have recovered (and more) after three years.

How much the market will recover and how long any recovery will take is not something we can predict. However, our investment professionals evaluate large volumes of good information, using their experience and understanding of markets and economies to make investment decisions that take advantage of growth opportunities while also protecting against market downturns and responding quickly to events when needed.

The information we have about the past shows that people who took their money out of the market or switched out of their long-term investment strategy after the crash would have been better off if they had rather kept their money invested. This insight demonstrates the importance of remaining invested, especially in times of uncertainty.

If you have quite a bit of time left before you will need to use your retirement savings to buy a pension, past market recoveries may make you more comfortable even if we don’t know for sure what will happen this time.

If you’re retiring soon, you might still be feeling uncomfortable. You may be thinking that your savings won’t have enough time to recover even if the financial market does recover like it has in the past.

It is important to consider the effect that other financial market shocks have on thae cost of buying a pension. Covid-19 and other shocks have resulted in the cost of buying a pension going down.

The pension you will receive after you retire depends on the amount of savings you have when you retire, the type of pension you buy and the cost of converting your savings into a retirement income (this is called buying a pension or an annuity). The cost of buying a pension changes over time and is mostly determined by changes in the interest rates on government bonds.

We have an example to show the effects of the recent financial market shock on a pension:

At the beginning of January 2022, a person with R1 million could have bought a guaranteed pension (life annuity) of approximately R6 936 a month. On 30 June 2022, after the financial market shock, they could have bought a pension of approximately R7 500 a month with their reduced retirement savings of R971 020. The pension amount increased by approximately R560, which shows that the recent financial market crash did not reduce the retirement income a pensioner could buy on 30 June 2022.

January 2022

R6 936

30 June 2022

R7 500

A month R1 million

A month

You may feel that your individual circumstances have worsened, or you may still be concerned. If this is your situation and you are close to retirement, take advantage of any retirement counselling offered by your fund to help you be better informed about your retirement savings and options.

It is especially important for you to speak to a financial adviser. An adviser can help you to make the best decisions based on your personal circumstances.

R971 020

R564 more

In general, members who are not well prepared for retirement can consider other options such as:

• working longer

• finding other sources of income

• delaying relying on a pension to live on

• reducing monthly expenses

They manage the investment portfolios your savings are in.

Before you make any changes to your retirement savings, make sure you’ve got good information, understand your options and have asked for help from a qualified financial adviser if you need it. Reactions to daily news during a financial market crisis can be costly and could stop you from reaching your goals. Take the time to understand and assess your options before acting. Speak to someone if you want help understanding your options or making a decision based on your personal circumstances.

Use this time of uncertainty to get more control of your financial situation. Do you know exactly what you spend your money on each month? Are there things you could do differently that may give you a better chance of reaching your goals?

Find out more about reducing expenses and keeping track of your budget.

Do you worry about how to pay off your debt? Would you like to manage your debt better?

Find out more about managing debt.

Don’t try to switch your investments based on speculation surrounding what the markets will do. We’ve put together a series of answers to some of the most topical questions investors have when experiencing market instability and its impact on their savings and investments.

How much are you saving towards retirement each month? How much have you been setting aside for emergencies? Are you saving enough? Are you on track? If you don’t know the answers to these questions or want to know why the answers are important:

• find out more about emergency savings and why they matter

• find out more about if you’re saving enough for retirement

• find out more about your retirement savings options if you are leaving your employer

Think about your goals and how you might achieve them. Decide if one of the following new habits, or a different habit, would be good for you and plan to start them:

• Monitor your expenses every month

• Draw up a budget and stick to it

• Start saving for emergencies

By starting a new good habit, you’ll be using this opportunity to put yourself in a better position to achieve what matters most to you. A financial adviser can help you with your financial plan.

Planning for your retirement is the most important financial decision of your life. The earlier you start, the better chance you will have of saving enough to live on when you retire. Watch this short video to find out more.

There are things that you can do at any age to give yourself a better chance of having enough to live on when you stop working or a better chance of reaching your goals. Find out more about what you can do at any age:

We will keep focusing on helping you reach your retirement objectives by managing your retirement savings and working continuously to meet your funds’ investment goals.

The goals you set yourself to achieve define the impact you want and the impact you make. At Alexforbes, we know that doing this starts with a deep understanding of your needs and the best solutions and variables that can influence good outcomes.

We draw on a diverse and rich base of knowledge and insight we have nurtured over decades. We connect it to holistic and independent advice so that your decisions of today have the impact you want tomorrow.

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Multi-Asset class portfolios build and implement their investment strategies based on a multitude of methods; the most popular being economic macro research; asset allocation modelling (strategic and tactical); relative asset class valuation; assessment of market risks; security valuation; portfolio construction and market hedging strategies. Its primary driver of return is its asset allocation strategy as it will seek to take advantage of the different expected returns between assets; while sector and/or security selection within the asset seek to provide additional sources of performance. The portfolio manager will also use the asset class exposures to manage an overall risk strategy.