Page 34 - Waterfall City July Issue 2023

Waterfall City News

Table 1: Chance of living to 100 Rule 2: Consider inflation
Chance of survival 65-year-old man 65-year-old woman 65-year-old couple* Protecting your savings against inflation
50% chance 85 years 89 years 94 years is crucial. Assuming South African long-
30% chance 91 years 95 years 99 years term inflation averages about 6% per
25% chance 93 years 97 years 100 years annum, you in essence start every year
20% chance 95 years 99 years 102 years with minus 6% and need to ensure that
10% chance 100 years 104 years 106 years you invest in such a way that you can
*At least one surviving spouse Source: Sanlam recover that 6% and then grow the real
value of your savings on top of that. For
example, if a balanced portfolio offers a
Graph 1: Your savings rate doubles every decade if you
start later return of 11% per year, the real growth
only equates to about 5% a year.

Rule 3: Start early
When you do not add to or grow your
savings, your required savings rate
doubles every decade. A person who
retires at age 60 has a life expectancy of
85 years, and has a required real return
of 5% (as the previous point mentions)
– they should save 12.5% of their salary
from the age of 20, but that rate roughly
doubles every 10 years. The longer
Assumed retirement at 60, life expectancy of 85, Return on Equity of 11%, inflation you delay, the steeper the climb. In the
of 6%, 100% replacement income. words of American author H. Jackson
Source: PSG Wealth research team Brown Jr.: “The best preparation for
tomorrow is doing your best today.”
Graph 2: Nominal returns (before inflation, fees and taxes) Start early to lessen the load.

Rule 4: Know where to get
‘bang for your buck’
Investments need to have exposure to
growth assets like equities to counter
inflation. Equities have historically
delivered better returns than other asset
classes. This is because the impact of
short-term market downturns weakens
when staying invested for 10 years or
more. Data also shows that equities
have offered the best real returns over
Source: PSG Wealth research team longer periods.

Graph 3: Real returns (after deducting 6% inflation, and Rule 5: Being overly
before fees and taxes) conservative can be a risky
strategy
Not all asset classes are engineered to
protect savings against inflation. For
example, cash is a great way to cater
for short-term income needs but is
the weakest guard against inflation. A
portfolio that consists solely of cash is
all but guaranteed to underperform
inflation after fees and taxes. As a stable
asset class, it may provide short-term
comfort; but over the long term, the
opportunity cost is significant.
Source: PSG Wealth research team

32 Waterfall City Issue 7 2023