One of the biggest risks South Africans face when saving for retirement is living longer than expected. In financial circles this is called "longevity risk" and it refers to the very real risk of living longer than your retirement capital can produce a retirement income, explains Dr Koos du Toit, chief executive officer of P3 Investment Group.
South Africans who do not want to be dependent on government or their children after retirement need to investigate an alternative to traditional retirement savings vehicles to ensure they will be financially independent after retirement, no matter how long they live.
It is a growing risk, given that medical technology continues to evolve apace, allowing people to live ever longer. In fact, it is believed that the first person to live to 150 years has already been born. And it is expected that children who are born 20 years from now could live beyond 400 years old.
So how can ordinary South Africans ensure that their retirement savings will last long enough? Even the small minority of just 5 percent of those who have a retirement fund and who will be able to retire financially independent, face the risk that their retirement savings may not be sufficient to produce an income beyond the normal life expectancy, he points out.
Du Toit says it is not as simple as increasing your retirement savings contributions: if your retirement fund contributions are based on a life expectancy of 80, these contributions would have to increase by almost 50 percent to maintain the income for another 10 years to age 90.
In fact, for each additional year you make provision for living in retirement, you need to accumulate approximately 5 percent more capital.
“South Africans who do not want to be dependent on government or their children after retirement need to investigate an alternative to traditional retirement savings vehicles to ensure they will be financially independent after retirement, no matter how long they live.
“To do this, you need to create an ongoing passive monthly income for life, which also offers a built-in hedge against the ravages of inflation.”
An ongoing monthly passive income, hedged against inflation, is precisely the outcome of a well-selected and well-managed buy-to-let property portfolio.
A buy-to-let property asset in a good area with solid rental demand and strong prospects for capital growth, which is well-maintained over time, will continue to deliver a passive income to the investor year after year, for as long as the property is held.
This could be for life, or even beyond, if the property is acquired and held in a correctly-structured trust.
In fact, there are properties in the UK, Europe and the US that were acquired hundreds of years ago, and these properties continue to deliver a passive income to the families of the original owners several generations down the line.
This passive income from an income-producing property is also hedged against inflation, regardless of how long it is received, since the rental income increases year after year in line with inflation, or by the amount stipulated in the lease, usually 8 percent.
This means that the income received retains its buying power year after year, so you are able to maintain your standard of living, regardless of how many years your retirement spans.
Of course, such a buy-to-let property investment portfolio will also deliver capital growth over time, but this is considered a bonus.
“The real power of buy-to-let property investment is the ongoing, inflation-linked passive monthly income it produces.”
However, property investors with a long-term investment horizon are richly rewarded by superior capital growth over the years - which can be considered an additional bonus.
This capital growth can be accessed at retirement age by selling the property or taking a bond against the property asset, even as it continues to produce an income.
A small but highly profitable property portfolio is one of the best investment alternatives for South Africans who have been deeply disappointed by the performance of their traditional investment and retirement plans, and also face the very real risk that their retirement savings will run out long before the days of their lives do, according to Du Toit.
He adds that for those who want to build a financially-independent retirement, a portfolio of buy-to-let properties will not only produce a monthly passive income regardless of how long they might live, but will also continue to appreciate in capital value, year after year.
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