Question
My question concerns the huge drop in the value of me and my husband's retirement annuities (RAs). His RA matures at the end of May and dropped from R320 000 to R205 000 or thereabout.

Should we leave or transfer it? We were both, without our knowledge, invested in equity/market related funds.

Answer
British comic writer, Douglas Adams once said: "Time is an illusion. Lunchtime doubly so." A mistake most often made in retirement planning is that of confusing your retirement and your money. As you prepare to drop a gear, open the sunroof and settle into the slow lane, this is the precise time when your money needs to step up and work even harder! So, when considering your expected time horizon, forget your retirement date ('under five years') and rather focus on how long you expect your money to still work for you post retirement.

With many people retiring earlier (by will or otherwise) and living longer, the average lifespan in retirement could range anywhere from 25 to 35 years and beyond. With this in mind, there are two very important factors to consider. Firstly, with that kind of time horizon, short-term volatility is not of paramount importance. Secondly, one needs to carefully evaluate where you are most likely to get the kind of returns to fund your retirement for this length of time.

For the 12 months ended 30 April 2009, the JSE All Share Index posted a return of -30.33 percent. Now although it is natural for one to shudder at the thought of any loss, one should be mindful of the overall performance of this asset class and remember that short-term volatility is no stranger to the equity market. If we just look at the last five years, equities have produced growth of 18 percent per annum. This would mean that if you had invested R100 five years ago it would be worth R228.77 today. Considering that this takes into account last year’s dismal results, it is only fair that we afford it the positive recognition it deserves. If we extend this out to ten, twenty or even thirty years, the outcome is much the same — sound inflation-beating returns. Markets go up and markets go down, but when we filter this through the hourglass of time we see that there is no other asset class that has performed as well over the longer term.

What is also apparent is that every strong Bull Run experienced in the market was superseded by a year or two of muted and/or negative returns (much like the year we’ve just had). There is a lot of evidence to support the fact that what we are experiencing is very 'normal' and that the market will recover. The big question remains as to when exactly this will take place.

With that said, where does that leave you as an investor still in the accumulation phase of your life? There is no doubt that the market has presented many quality shares at bargain basement prices that will surely offer exceptional value going into the future. To benefit from this, fund managers are in a position to trade some of the less attractive assets classes (e.g. bonds and even cash) and begin looking at shares that offer more potential for growth. In addition to this, all the 'new' money that is attracted by regular premiums can go directly towards buying the 'cheap' shares without the risk of opportunity cost from trading off a previous share or asset class. This market phenomenon is known as rand-cost averaging and is undoubtedly one of the most powerful mechanisms available to investors. What this essentially allows is for you to purchase more units per rand while the market is suppressed and therefore benefit from the upswing. The longer the weak performance continues the more shares you will be able to accumulate.

The question of transferring would be best addressed by having a clear understanding of what kind of lifestyle your investments need to provide. This will then drive the kinds of returns needed to achieve this. The most reliable way of achieving these returns is by sound asset allocation, which will ultimately dictate the kind of volatility (risk) you will be exposed to. Finally, do the sleep test. Will you be able to rest easy with the allocation you need considering the way in which it is likely to behave. If yes, you’re all systems go. If not, go back to the beginning and re-evaluate the funding levels you need.

As with all finance-related decisions, I strongly suggest that you meet with a Certified Financial Planner to develop a meaningful financial plan to navigate you through the next few years as well as into retirement. In preparation for your retirement, sound financial management is imperative and quality professional advice will prove invaluable in the years that follow.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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