Words on wealth: should your investments change as you age?

Your retirement investments are not static. They need to be reviewed from time to time in accordance with an overall retirement plan, and there will be times in your life when changes will need to be made.

It is prudent to reduce investment risk as you get older, especially once you have retired. However, it is also widely agreed among investment experts that, to generate enough income for what may be a long retirement, you may need to maintain a relatively substantial portion of higher-risk investments all the way through.

Investment risk is the probability of your investment not performing as expected, typically through market volatility. When you have time on your side, volatility, which is a short-term risk, should not be a concern; in fact, it is necessary to ensure compounding, inflation-beating returns over the long term. But it does become a concern when you are approaching retirement, and even more so when you are in retirement and drawing an income from your savings.

Your investment journey can be divided into the pre-retirement (accumulation) phase and the post-retirement (decumulation) phase.

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Accumulation phase

During your working career, of about 40 to 45 years, you need to save for the time in your life when you won’t be working, which eventually comes to us all, whether we like it or not. Contributing to a retirement fund is the prime way of doing this because of the tax benefits, although you may supplement this with other investments.

Ideally, early in your career, you should formulate a long-term investment plan, preferably with the help of a trusted financial adviser or planner. In their comprehensive book on retirement planning, “The Ultimate Guide to Retirement in South Africa”, financial journalist Bruce Cameron and Certified Financial Planner Wouter Fourie stress the importance of having a plan. “Whatever your age or lifestyle group, the important thing is to plan. If you don’t know your destination, you will never reach it,” Cameron and Fourie say, adding that by the time you reach 50, you should be “fine-tuning your retirement targets”.

For most of the accumulation period, investment experts agree that the bulk of your savings should be in what are known as “growth assets” as opposed to safer, interest-bearing investments. This is because over longer periods, they are superior in delivering the needed growth.

“Growth assets” mainly comprise shares in listed companies (public companies listed on a stock exchange). Historically, this asset class, known as equities, has consistently outperformed interest-bearing assets such as bonds and cash by a substantial margin. According to the Old Mutual Investment Group’s Long-Term Perspectives 2025 report, over 20 years until December 2024, global equities delivered 15.3% a year, local equities 12.7% a year, local bonds 8.6% a year, and local cash 7.0% a year - against Consumer Price Index inflation of 5.5% a year.

Because there is the danger of a market crash just before you retire, a common approach is to “de-risk” your investments about five years before your retirement date by partially switching into the safer asset classes. Your retirement fund may be pre-programmed to do this for you unless you tell it otherwise. This approach, known as “life-stage” investing, has fallen out of favour with some investment professionals, who argue that, especially where their savings are falling short, investors cannot afford to de-risk.

One popular rule of thumb is the 100-minus-your-age rule: the percentage of your portfolio in growth assets is determined by subtracting your age from 100 (or 110, which is also sometimes used). In other words, if you’re 30 years of age, the equity component should be 70-80% and by the time you reach 60, it should be closer to 40-50%.

Ultimately, your investment decisions need to take your personal circumstances into account, including your accumulated savings, health, dependants, and capacity to work beyond retirement age.​

Decumulation phase

There are two main types of income-generating investments in retirement: a life (or guaranteed) annuity, which is provided by a life insurance company and gives you a regular income for life; and a living annuity, provided by an asset manager, in which you can choose the underlying, market-linked investments and how much to draw as an income, within limits. The risks with the latter are that you draw too much too soon, or the investments do not perform as expected, and you run out of money.

In a living annuity, the dilemma is that, unless you have more than enough saved (in which case it’s not necessary to take investment risks with your savings), you need “growth” assets in your portfolio to counter longevity risk: the risk of living longer than expected. But the accompanying volatility typically induces anxiety on the part of investors.

An argument against having a volatile portfolio in retirement – apart from the added emotional stress – is that the sequence of returns has a bearing on the outcome. A sequence of lower and then higher returns has a worse outcome than the average return over the period. Conversely, a sequence of higher and then lower returns has an above-average outcome.One strategy is to start with a living annuity and change to a life annuity after about 15 years. Another is to have a blend of both from the start.“To achieve the most appropriate solution requires sound advice from a reputable planner with whom you have built a long-term relationship,” Cameron and Fourie say.

* Hesse is a former editor of Personal Finance.

PERSONAL FINANCE