Income focused investors need to review plan

South Africa has a new class of vulnerable, threatened citizens – ‘rate victims’ on pension who are reeling from the prolonged effects of historically low levels of interest, says Johan Gouws, Head of Absa Asset Consulting.

Many of these victims need to make rapid adjustments to their financial plans as low interest rates may well persist, said Gouws.

He said some pensions now make do on less than half their previous income. “In less than four years the Reserve Bank cut interest rates by 7%.

“During the final quarter of 2008, local investors still received approximately 12% interest on their investments. A pensioner with R1 million of retirement capital would have received around R120 000 in interest or R10 000 a month.

“After the most recent interest rate cut in July 2012 an investor with R1 million of retirement capital now receives about 5% interest, equating to R50 000 a year or roughly R4 200 a month. In other words, these rate victims live on less than half the income they received forty two months ago.”

What’s more, income-dependent pensioners face rising food, energy and medical costs.

“Pensioners are caught between declining rates and the rising cost of living,” said Gouws. “In addition, the local rates outlook does not look promising for pensioners, given the expectation that rates could remain at current levels well into 2013. Consumer price inflation is expected to rise during the remainder of 2012.

“To balance their budgets, pensioners have to rethink their investment strategies and review their spending habits.”

To meet long-term income requirements pensioners have to invest in the most appropriate asset classes. Portfolios must produce the highest possible interest and dividend income while also enabling their capital to grow.

Every case is unique, but Gouws suggested possible strategies for two distinct groups: pensioners who draw less than 6% of their income and those who draw 7% and more per annum.

The less than 6% group: These pensioners are “relatively comfortable”, but still threatened by inflation, indicating the need to invest in a portfolio containing assets such as bonds, listed property and equity for capital growth in the medium to long term.

He adds: “Pensioners who are currently wary of investment markets need to ignore short-term fluctuations and perhaps take additional investment risk to meet longer term investment goals.”

The 7% plus group: Pensioners here need more income than currently provided by interest and dividends. The need for high drawdowns limits the scope for investment risk.

They need to invest in interest-bearing instruments with the highest rate of return but which also offers some potential for capital growth to counter inflation.

“One option,” says Gouws, “is an aggressive income type of portfolio that invests in a combination of cash, bonds and listed property. Where fixed deposit investment types are involved, longer fixed investment periods would offer higher interest returns.”

Any investment strategy should be accompanied by a spending review. He warns: “The hardest hit rate victims may have to forgo non-essentials until the economy recovers.”

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