It doesn’t matter which social media platform you are using, it’s clear that it’s that time of the year when everybody’s off to some or other holiday destination. Some have to book months, or even years in advance to reserve the perfect spot in the Kruger National Park, while others opt for a more exotic destination overseas. But whether it’s Parys (in the Free State) or Paris (France), these breakaways have one thing in common, and that is the fact that they have to be planned well in advance.
In the spirit of National Savings Month this July, I would like to know why the same amount of planning and effort cannot be put into your retirement plan? I can understand if you are declared medically unfit, or if you lose your job, but in most cases, retirement is a choice – and ideally one for which you need to plan at least five years in advance.
This week, I would like to discuss three practical tips to use while structuring your investments during the last five years prior to retirement:
“Time is wastin’, Time is walkin’”
Rock band, Hootie and the Blowfish said it best in their 1995 hit, “Time”, when they asked why time punishes us and why it just walks away. Time is the one commodity that we cannot get back, but if you use the time prior to your retirement wisely, you can save yourself from a lot sleepless nights. Wealth Manager, Rita Louw (PSG Wealth Old Oak) says, “Part of my holistic planning process involves restructuring my client’s investments/portfolios so that they can generate more income as we move closer towards retirement”.
This is usually done through focusing on money market and bond investments, as well as high dividend yield shares. It creates a feeling of calmness closer to retirement, because clients can firstly start to see its income generating ability, and more importantly, less volatility.
But Louw also warns against overdoing it. She says that during times such as the last five years where growth in local investments has been very limited, emotions tend to get the upper hand. Growth investments remain the best type of investments to keep up with for example medical and food inflation in the long run.
Active, not passive
This is a big decision and maybe not the easiest time to make it. You want to squeeze maximum growth out of your investments, because you want to grow your capital – which will ultimately supply you with an income_ to be as much as it possible when the time comes. And this remains one of the biggest traps that investors tend to fall into shortly before retirement.
Let’s suggest that an investor had invested all of their capital in a fund that is fully invested in shares in May 2008, one year before their retirement (I will only be using the FTSE/JSE All Share Index, or just JSE as vehicle), in an attempt to have as much capital available at retirement as possible. At that point, they decided on an annual withdrawal rate of 5%. If they retired in May 2009, after the JSE lost 26% of its value, and they withdrew an income of 5% (escalating by a 6% inflation rate annually), they would have had to wait until August 2012 to see the same balance as in May 2008.
If they had invested in an average South African Multi Asset High Equity fund (sector average – balanced fund) in May 2008, they still would have experienced a drop of 15% in their investment value, but with the same income requirement, they would have been able to see a recovery in their investment balance to the same level as at May 2008, as early as February 2010.
High dividend yield shares don’t have to mean less growth
As I mentioned before, at this stage it is important to structure your investments in such a way, that they can provide you with an increasing income in the future. I am told quite often that high dividend yielding shares will not be able to provide sufficient growth over the long term, but when we examine the data, it becomes clear that this is not the case.
Over the past 10 years (30 June 2009 to 30 June 2019), the JSE delivered an average annual dividend yield (DY) of 2.83%. The FTSE/JSE Dividend Plus Index (Divi), delivered an annual DY of 4.69% over the same period. The Divi is made up of 30 shares that have the best 12-month expected dividend yield. In comparing these figures alone, clearly the “limited growth” theory is unfounded. When we look at these two indices’ growth over the same period, the Divi index, with growth of 15.1%, managed to outperform the JSE with its growth of 10.27% quite comfortably, and it was less volatile than the JSE.
I am not saying that you should put everything you’ve got into high dividend yield shares, but don’t be afraid to include them in your total portfolio, especially not in those last few years before you retire.
The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.