PLANNING FOR RETIREMENT

1. PLANNING FOR RETIREMENT Recent developments, trends and cases Rowan Burger Momentum Employee Benefits

2. AGENDA A Holistic view of a client What is Wealth? What are the risks to capital accumulation? How do I construct a holistic solution? How will I do this in a new retirement reform landscape?

3. TRADITIONAL UNDERSTANDING OF RETIREMENT Development Phase Accumulation Phase Decumulation Phase Legacy WEALTH

4. WE FORGET OUR YOUNG CLIENTS’ BIGGEST ASSET Knowledge and Skills development a fantastic investment in yourself Why education is so important WEALTH

5. TIME WE CONSIDERED THE TOTAL PICTURE Generally bond like exposure The nature of this income determines the correct accumulation strategy WEALTH So need equity exposure here We should not really think of other assets – but we are a consumerist society

6. WHAT DOES THIS MEAN? Most clients are wealthy as they start working We need to protect them from destroying that wealth By their own devices (Fear & Regret) Unexpected shocks that destroy this wealth The key is empowering your clients to convert that future potential to real assets to provide for a comfortable retirement At Momentum – we think of this as ensuring a client’s Financial Wellness

7. We are underestimating how fast this line is moving out WHEN CAN YOU RETIRE? Downward sloping line representing desired retirement income and legacy WEALTH

8. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Longevity Health Expenses Future Expected Returns Regulatory Burden

9. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Number who reach 100 in Britain and get a telegram from the Queen Longevity Health Expenses Future Expected Returns Regulatory Burden

10. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Number who reach 100 in Britain and get a telegram from the Queen Longevity Health Expenses Future Expected Returns Regulatory Burden RECTANGULARISATION OF MORTALITY

11. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Longevity Health Expenses Future Expected Returns Regulatory Burden Longevity Health Expenses Future Expected Returns Regulatory Burden RECTANGULARISATION OF MORTALITY

12. WHY IS RETIREMENT GETTING MORE EXPENSIVE? • Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. • For survivors to age 85, more than one-third of their lifetime expenditures will accrue in their remaining years The Lifetime Distribution of Health Care Costs Alemayehu and Warner • In the US, Mean total last-year-of-life expenditures did not differ greatly by age at death but non-Medicare last-year-of-life expenditures were higher and Medicare last-year-of-life expenditures were lower for those dying at older ages. • Last-year-of-life expenses constituted 22 percent of all medical, 26 percent of Medicare, 18 percent of all non-Medicare expenditures. Medical Expenditures during the Last Year of Life Donald R Hoover et al Longevity Health Expenses Future Expected Returns Regulatory Burden

13. WHY IS RETIREMENT GETTING MORE EXPENSIVE? • Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. • For survivors to age 85, more than one-third of their lifetime expenditures will accrue in their remaining years The Lifetime Distribution of Health Care Costs Alemayehu and Warner • In the US, Mean total last-year-of-life expenditures did not differ greatly by age at death but non-Medicare last-year-of-life expenditures were higher and Medicare last-year-of-life expenditures were lower for those dying at older ages. • Last-year-of-life expenses constituted 22 percent of all medical, 26 percent of Medicare, 18 percent of all non-Medicare expenditures. Medical Expenditures during the Last Year of Life Donald R Hoover et al Longevity Health Expenses Future Expected Returns Regulatory Burden

14. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Longevity Health Expenses Future Expected Returns Regulatory Burden

15. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Longevity Health Expenses Future Expected Returns Regulatory Burden

16. WHY IS RETIREMENT GETTING MORE EXPENSIVE? Longevity Health Expenses Future Expected Returns Regulatory Burden • FAIS • TCF • RDR • Solvency II (SAM) • Threat of NSSF

17. YOUR CLIENT MAY NOT GET THERE? Required capital to retire on desired retirement income

18. WHAT ARE THE OPTIONS? YOUR CLIENT MAY NOT GET THERE? Required capital to retire on desired retirement income B Work for Longer Retire on Less A

19. WHAT ARE THE OPTIONS? B Work for Longer C Retire on Less A Save more or take more investment risk

20. WHAT ARE THE OPTIONS? B Work for Longer C Save more or take more investment risk Retire on Less A

21. WHAT ARE THE RISKS TO BUILDING RETIREMENT SAVINGS? Investment Returns Fees, Expenses, Taxes Inability to work retrenchment, early retirement disability Non Preservation

22. IF YOU BECOME DISABLED AT 40?

23. IF YOU BECOME DISABLED AT 40?

24. IF YOU BECOME DISABLED AT 40? NON PRESERVATION AT 30 & 40?

25. NON PRESERVATION AT 30 & 40?

26. HENCE PROPOSALS TO ENFORCE PRESERVATION • New assets from P day (Legacy Assets protected) • Allow phased withdrawal (10% p.a.) • Remove differences between pension and provident funds • Ensure annuitisation at retirement • Trustees have greater role by determining default options when member leaves a fund (exit or retire) • Proposal to enhance Trustee governance and skills

27. WHY INSURANCE IS A KEY COMPONENT TO ANY RETIREMENT PLAN • Need to protect your financial wellness in the event of: • Death • Disability • Health • Retrenchment

28. HOW SHOULD YOU THINK OF ASSET ALLOCATION IN RETIREMENT SAVINGS PLAN

29. HOW DO YOU ACHIEVE THIS? HOW SHOULD YOU THINK OF ASSET ALLOCATION IN RETIREMENT SAVINGS PLAN This is where the wrong expectation is created of advisers and financial services companies

30. HOW DO YOU CONSIDER INVESTMENT AND RISK IN EACH BUCKET? HOW DO YOU ACHIEVE THIS?

31. RUBBISH – I CAN MAKE MY CLIENT WEALTHY! Consider two individuals, both saving the same percentage of salary. Bob is on the 25th percentile of the SARS income stats, Bill is on the 75th percentile. If you the advisor can secure Bob a 3%higher return each year, how long before he can overtake Bill’s accumulated wealth? 70 years Bob starts on 75 800 p.a. and Bill on 242 800 p.a. (Based on SARS 2012 stats for the 4.5 million South Africans who actually submitted tax returns of an estimated 13 million potential workers)

32. OKAY – LETS MAKE IT A LITTLE EASIER THEN: RUBBISH – I CAN MAKE MY CLIENT WEALTHY! Consider two individuals, both saving the same percentage of salary. Bob is on the 25th percentile of the SARS income stats, Bill is on the 75th percentile. If you the advisor can secure Bob a 3%higher return each year, how long before he can overtake Bill’s accumulated wealth? 70 years Bob starts on 75 800 p.a. and Bill on 242 800 p.a. (Based on SARS 2012 stats for the 4.5 million South Africans who actually submitted tax returns of an estimated 13 million potential workers)

33. OKAY – LETS MAKE IT A LITTLE EASIER THEN: Consider two individuals, both saving the same percentage of salary. Joan is on the40thpercentile of the SARS income stats, Jill is on the60thpercentile. If you the advisor can secure Joan a 4% higher return each year, how long before he can overtake Jill’s accumulated wealth? 22 years Joan starts on R113 500 p.a. and Jill on R175 300 p.a. (Based on SARS 2012 stats for the 4.5 million South Africans who actually submitted tax returns of an estimated 13 million potential workers)

34. HOW DO I GO ABOUT INSURING MY ASSETS? • Building up assets over the short term replaces the need for insurance for emergencies and is arguably cheaper • Longevity protection and investment guarantees are also an important insurance consideration

35. HOW DO I GO ABOUT PROTECTING INCOME? • It is as much about asset allocation as it is asset location • Clear trade off between incentivised savings that will be less liquid and those where urgent access may be required

36. THINKING ABOUT ASSET LOCATION • 3/ 6 month emergency fund • Access Bond • Education Policies • Savings goals (eg holidays, deposits) • Accumulating retirement capital

37. IN THE NEW ENVIRONMENT: Compulsory preservation ties up this capital So new tax exempt savings vehicles are being proposed here • 3/ 6 month emergency fund • Access Bond • Education Policies • Savings goals (eg holidays, deposits) • Accumulating retirement capital

38. IN THE NEW ENVIRONMENT: So new tax exempt savings vehicles are being proposed here Which include unit trust investments Compulsory preservation ties up this capital But you have your 10% draw Compulsory preservation ties up this capital So new tax exempt savings vehicles are being proposed here • 3/ 6 month emergency fund • Access Bond • Education Policies • Savings goals (eg holidays, deposits) • Accumulating retirement capital

39. WHAT DOES THE NEW WORLD LOOK LIKE? National Treasury and Industry are committed to creating an environment where products are simpler and delivery is easier The problems these simpler products are looking to solve are becoming more complex By taking a more holistic look at an individual’s needs, we are able to develop strategies that protect their financial wellness and secure a comfortable retirement

40. THANK YOU