Traditionally, we’ve been taught that as clients approach retirement, their investment portfolios should gradually be de-risked—transitioning to a point of near-zero risk once retirement begins. However, in the South African context, this approach may do more harm than good. With high inflation and ongoing currency depreciation, excessive exposure to local cash or bonds can significantly erode long-term purchasing power.
Offshore growth assets offer a vital hedge against these risks and should play a central role in the retirement strategy.
Key Considerations in Retirement Planning
1. Client Age and Profile
- Younger retirees still require significant exposure to growth assets to ensure long-term sustainability of their income.
- Older retirees may reduce their growth allocation gradually, but eliminating growth assets entirely can compromise income longevity.
- Drawdown Rate: A high drawdown rate (e.g., 6%-7%) increases sequence risk—the risk of poor market returns in early retirement years—and requires a careful balance between income stability and portfolio growth. The overall size of the client’s retirement capital also determines how much buffer is available to manage this risk.
- Risk Tolerance: Clients must be able to emotionally withstand market volatility. In some cases, clients with limited resources and high drawdown needs may need to take on more risk than they are comfortable with, which requires delicate management.
2. Why Offshore Growth Matters
- Rand Hedge: Offshore investments help protect purchasing power against local currency depreciation.
- Diversification: The South African equity market is highly concentrated and lacks access to many of the world’s largest and most innovative companies. Offshore markets offer exposure to sectors and opportunities not available locally
The Bucket Approach: A Structured Solution
At WGA Wealth, we use a proven method known as the bucket approach to retirement income planning. This strategy structures investments across three or four key buckets:
- Bucket 1 – Income (Year 1): Capital is invested in low-risk, liquid instruments to meet the client’s immediate income needs.
- Bucket 2 – Stable and Balanced (Years 2-3): This portion of the portfolio offers a balance between income generation and capital preservation.
- Bucket 3 – Growth (Long-Term): The remainder is allocated to growth assets, with a significant portion in offshore equities to ensure long-term portfolio resilience and income sustainability.
Life annuities, or a combination of life and living annuities—often referred to as a hybrid approach—can be effective tools for ensuring the long-term sustainability of investment income. For example, a life annuity can be used to replace ‘Bucket 1,’ as previously discussed, or simply to boost overall income levels.
While there is no one-size-fits-all solution, we find that South African retirees generally benefit from allocating 40%–60% of their growth assets offshore, depending on their specific goals and financial circumstances.
Wim van Zyl
Wealth Manager