<\/p>\n
Having worked as an asset consultant for more than a decade \u2013 advising institutional clients, interacting with employee benefits consultants, and engaging directly with retirement fund members on their journey to retirement \u2013 one question continues to surface: is a life stage model still relevant?<\/p>\n
This is such an interesting and increasingly important question. However, in order to answer it, we must first revisit what a life stage model is and what it is designed to do.<\/p>\n
In the context of investment or retirement planning, a life stage model (mostly commonly referred to as a de-risking model) is a strategic approach that automatically adjusts a retirement fund member\u2019s asset allocation according to their age or proximity to retirement.<\/p>\n
The fundamental principle behind this model is straightforward: as individuals age, their \u201chuman capital\u201d (the capacity to generate future income) decreases. At the same time, their \u201cfinancial capital\u201d needs to be protected from market fluctuations.<\/p>\n
Under a typical life stage framework, fund members are automatically defaulted into a portfolio based on their age or years remaining until retirement.<\/p>\n
Members who are furthest from retirement are generally placed into a portfolio with a higher allocation to growth assets. Growth assets are typically categorised as local and global equities, as well as property.<\/p>\n
These assets offer higher expected long-term returns, but also expose members to greater levels of volatility.<\/p>\n
As members approach retirement, their exposure to growth assets is gradually reduced, with a corresponding increase in defensive assets. Defensive assets are broadly classified as local bonds, cash and money market instruments.<\/p>\n
These assets offer a lower return profile, but also provide a greater level of stability and capital preservation. This is especially important in the two years leading up to retirement.<\/p>\n
A typical life stage model.<\/p>\n
From a retirement planning perspective, most life stage models broadly operate across three phases: accumulation, consolidation and preservation.<\/p>\n
The aim is not only to simplify investment decision-making for members, but also to remove emotional bias.<\/p>\n
Left to their own devices, members often react poorly to market volatility \u2013 either becoming overly conservative too early, or remaining exposed to growth assets for longer than their circumstances realistically allow.<\/p>\n
A typical life stage investment framework.<\/p>\n
For management committees and boards of trustees, life stage models play a crucial role in helping them fulfil their fiduciary responsibilities.<\/p>\n
They help to ensure that the fund\u2019s investment strategy is aligned with member\u2019s future liabilities (namely, their need for a sustainable monthly income in retirement).<\/p>\n
These models also assist committees and boards by providing a structured and defensible default solution for members who either lack the necessary financial knowledge or do not actively engage with their retirement planning.<\/p>\n
The \u201cdefault\u2019 life stage model recognises that it is not only the size of returns that matters, but also the timing of those returns.<\/p>\n
By de-risking in the various phases, the model seeks to protect members from the effects of \u201cnegative compounding\u201d right at the point of exit.<\/p>\n
That said, life stage models are not without critics.<\/p>\n
We all understand that one size does not fit all. We also understand that a \u201cretirement fund\u201d in some cases is a fund member\u2019s biggest savings vehicle and managing how it is invested is critically important.<\/p>\n
A competing school of thought argues that members should remain fully invested in growth assets throughout their working lives and even into retirement.<\/p>\n
The rationale behind this view is that de-risking essentially compels members to sell growth assets as they approach retirement, only to re-enter those same assets when buying a living annuity.<\/p>\n
This is seen as a pointless endeavour as you\u2019ve sold low and are now buying back high.<\/p>\n
This argument is further supported by increasing life expectancies. With the advent of modern medicine, most 65-year-olds now have an extra investment horizon of 25 to 30 years.<\/p>\n
This essentially means they remain long-term investors and could arguably stay invested in growth assets in order to try and combat inflation risk. This, in some cases, is seen as an even bigger risk than market volatility over those 25 to 30 years.<\/p>\n
While this logic is sound in theory, it assumes a best\u2011case retirement scenario. This does not reflect the reality faced by many South African retirement fund members.<\/p>\n
A significant proportion of members may not meet the requirements for a living annuity, or may not be willing or able to accept the risks that come with purchasing one.<\/p>\n
Living annuity vs Life (guaranteed) annuity<\/p>\n
Does the \u201cstaying in growth\u201d strategy make sense? Yes, for a wealthy fund member with a high replacement ratio, it technically does.<\/p>\n
For these members who are likely to move into a living annuity, de-risking is often seen as a drag on their long-term wealth. In practical terms, this approach can be risky for many members.<\/p>\n
For many, a guaranteed annuity remains the more appropriate outcome, and poor market timing at retirement can have severe and irreversible consequences. In this context, the life stage model acts as a crucial safety net against bad timing.<\/p>\n
This is why most asset consultants stress that retirement planning, along with engaging a certified financial planner, should happen long before retirement.<\/p>\n
Ideally, these discussions should start 10 to 15 years before retirement and continue regularly thereafter. This way, your retirement plan is set long before any de-risking begins.<\/p>\n
In an ever-changing investment landscape, there is room for both a default life stage solution as well as a tailored, growth-orientated strategy.<\/p>\n
The key is ensuring that members understand their individual circumstances and receive appropriate advice before making decisions that will shape their retirement outcomes.<\/p>\n
So, is life staging still relevant?<\/p>\n
The short answer is yes. The longer answer is that, when properly applied, the life stage model is a powerful and necessary tool for protecting retirement fund members \u2013 especially those who do not have access to ongoing professional financial advice.<\/p>\n
As my father once said to me, poor planning creates far bigger problems than markets ever will. In retirement investing, that lesson remains as relevant as ever.<\/p>\n
#life #stage #investment #models #relevant<\/p>\n","protected":false},"excerpt":{"rendered":"
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