Case Study - Retirement Planning
In order to provide appropriate advice in terms of the FAIS Act, we need to have all the relevant information from a client.
Mr Page approached us for advice regarding his retirement. He was 45 years old and had belonged to his company’s pension fund for the past 20 years. He was contributing 10% of his salary of R45,000 per month to his pension fund. The resignation value of his pension fund was R1,867,000. He also had a retirement annuity to which he had been contributing R367.00 per month for the past 15 years. The underlying value was R168 400.
Mr Page wanted to know if he had made adequate provision for his retirement if he planned to retire at age 65 and wanted to receive a pension of 75% of his final salary. We went back to him and requested more information. We wanted to know what the underlying asset allocation (i.e. number of shares, gilts, bonds and property) of his pension and retirement annuity was. After some searching, he came up with the following information:
Pension Fund
- 15% Shares
- 6% Property
- 22% Gilts
- 57% Money Market
Retirement Annuity
- 32% Shares
- 15% Property
- 53% Money Market
We then went to work on establishing how much capital he would require at age 65 to provide a pension of 75% of his final salary, keeping in mind that the pension would also have to increase annually in line with inflation (6%). His final salary would be R144,321 per month; 75% of that (R144,321) would be R108,240.82 or R1,298,889.87 per annum.
The total capital required at age 65 to achieve his goals would be R21,600,798, assuming inflation of 6% during retirement, 11% capital growth and satisfying the requirement that the capital would have to last until his 95th birthday. An analysis of his current position revealed that his pension fund (with current asset allocation) would yield R12,284,374. There would be a shortfall of R9,316,423. This is largely as a result of the underlying asset allocation being too conservative.
As he had more than 10 years left to retirement, he needed to have far more equities in both portfolios. The current pension fund legislation allowed the equity exposure to be as high as 75% of the total portfolio.
We suggested that he contact his pension fund administrator and request that the asset allocation be altered to the following:
- 75% Shares
- 6% Property
- 15% Money Market
- 4 % Gilts
We altered the retirement annuity asset allocation to:
- 75% Shares
- 6% Property
- 15% Money Market
- 4 % Gilts
The new structured portfolios could yield a capital value of R26,468,086.
This would be R4,867,288 more than would be required. If this could be achieved, Mr Page could end up with a pension of R1,591,567 per annum instead of the R1,298,889.87 he required. That would equate to R132,631 per month or 92% of his final salary. So without having to invest more money from his after tax income, he could more than adequately achieve his retirement goals.
Setting investment goals and structuring the total portfolio so that it is aligned with these goals are probably the most important considerations when financial planning for retirement takes place.