Three Risks You Face

As a pensioner, there are three important risks you must think about when considering how to use your Fund savings at retirement, namely:

• Investment risk
• Inflation risk
• Somewhat surprisingly, the risk of living too long!

Investment risk

Investment risk refers to the chance that the investment return you earn on money that you invest at your retirement is too low to provide a reasonable income throughout your retirement.

Investment risk depends largely on the asset classes (e.g. shares, bonds or cash) in which you invest your money, and your investment time horizon.

Inflation risk

One of the big risks you face in retirement is that inflation reduces the buying power of your pension.

It is very difficult to predict the future course of inflation. It is therefore important that you invest your retirement money, or at least the part which covers your basic needs, in such a way that your income goes up each year more or less in line with inflation.

The following chart shows how the buying power of R100 declines over each of the next 20 years if average future inflation is 5% p.a., 10% p.a, and 15% p.a.

Clearly, future inflation is a significant risk to your standard of living during retirement.

Risk of living too long

This seems like a strange risk - but the longer you and your dependants live, the more money you will need while you are on pension.

Many people have a pessimistic view of how much longer they will live once they retire. The following table shows how long, on average, a male and female are expected to live if they retire at different ages.

Retirement age	Male life expectancy	Female life expectancy
50	28 years	33 years
55	23 years	29 years
60	19 years	24 years
65	16 years	20 years
70	13 years	16 years

Thinking about your “Basic Needs” and “Good-to-have” (luxury) needs

In meeting your Basic Needs, we suggest that you should aim to protect yourself against the three key risks: inflation, poor investment growth, and the risk of living too long. Ideally you would want a pension that:

• Is guaranteed to meet your basic needs (and those of your dependants) each year;
• Will increase each year in line with inflation; and
• Will be paid for the rest of your lifetime and that of your spouse or dependants.

On the other hand, in meeting your "good to have" needs, you can consider taking on more risk. Ideally, you would structure your investments with the following in mind:

• You would be prepared to take on more investment risk, provided that there is a good chance that you will be compensated for this risk. Importantly, you must be able to live with the “regret” that you may feel if the investment returns turn out to be poor.
• You have a longer-term investment time horizon, and if the investment does poorly in any year it does not matter much, because you don't need the money to cover your basic needs.