As the stock market continues to tank the world over in general and Nigeria in particular, some retirees are getting worried as to whether their retirement savings will suffice for them in retirement. I have personally lost 15% of my retirement account balance to the “ugliness” of the market in last six months. For the first time in many years, many RSA and Retiree Funds in Nigeria recorded only fractional positive returns, at best, in January 2016. As a result of the dismal market performance recently, both retirees and those nearing retirement are looking for ways to protect their retirement income. While there are no hard and fast rules set in stone, savvy investors can do a few things to protect themselves. Here are a few of them
Expect and plan to live longer.
Advancement and knowledge in medical science has increased and continues to increase with technology. Doctors are getting not only better equipped to carry out medical diagnostics, the pharmaceutical companies are also advancing in the discovery and manufacturing of more potent medications. The result of all these has been that people now live longer than before. It will not be uncommon to see healthy 65-year-olds living well into their 80s or 90s.
The implication of this is that retirees may need 30 or more years of retirement income to care of their increased longevity arising from the facts noted above. The fact that you may live longer than expected implies that you will need more money than expected at retirement. So the earlier you factor this possibility into your retirement and personal financial planning, the better you will be ready to weather the storm when it comes. One way to do this is to use some of your retirement savings account (RSA) or Retiree Fund balances to purchase an annuity. By so doing, you will create a simple and efficient stream of income payments that are guaranteed for as long as you live.
Inflation is Alife and Well, prepare for it
Inflation is a way of our economic life, it is here to stay and does not seem to be going away. All that the government can do is to try to reduce its growth. Inflation impacts your retirement income because it has the tendency to eat away at the purchasing power of your money over time. By reducing the purchasing power of your retirement income, inflation invariably increases the future costs of goods and services. For example, a N1,000,000 RSA balance today will be worth N609,531 in 25 years’ time with an inflation rate of 2% and N477,606 if inflation rate is 3%. The fact that a relatively low inflation rate can have a significant impact on a retiree’s purchasing power, calls for a constant eye on it and a proactive plan to reduce its impact on one’s retirement income.
Unfortunately, Nigeria financial system does not have such instruments as Treasury Inflation-Protected Securities (TIPS). With TIPS, the principal increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. In the absence of TIPs, people can invest in growth-oriented stocks or stock mutual funds that are in line with their risk tolerance and appetite.
Keep a Constant eye on your investments
Granting the increase in longevity and impact of inflation, it behooves the potential retiree to position their investment positions for growth. Many retires, for fear of losing their nest egg, undertake an overly conservative investment strategy. While the preservation of the corpus of one’s income is desirable, a too conservative strategy exposes your portfolio to the erosive effects of inflation while limiting the long-term upside potential that diversified stock investments can offer, and can diminish how long your money may last. In the same vain, an overly aggressive strategy can expose you to undue risk in volatile markets. It pays therefore to pursue a strategy that aims at keeping the growth potential for your investments without too much risk. This entails having investments with asset allocation strategies that blend stocks, bonds, and short-term investments to achieve different levels of risk and return potential. It means constantly reviewing the asset allocation of your RSA or mutual funds as well as their monthly performance with a view to knowing the right time to rebalance your portfolio. Consider those RSA or mutual funds that not only diversified enough but are in line with your risk tolerance and investment horizon.
See Your Savings Account for what they are:
There is the temptation to de-save, especially during hard economic times. Rather than de-saving to maintain the status quo living standard, it is better to cut costs by trimming the non- essentials. During retirement, the speed at which one spends one’s savings determines how long such savings will last. Spending one’s savings too rapidly can also put the retirement plan at risk by making it insufficient in the long run. Therefore, it may be better for retirees to use conservative withdrawal rates by using their monies for particularly essential expenses. According to research, the ideal is to use a withdrawal rate of 4% to 5%.
Remember that it took years to build your retirement savings, it should not take days or months to spend it all. If you proactively think along the noted issues, you will most likely not out live your retirement savings.