MEMBER INVESTMENT CHOICE

Transcription

1 MEMBER INVESTMENT CHOICE This booklet will help you get a better idea of what member investment choice is and how it works. Please speak to a qualified financial planner before making any investment decisions. ALEXANDER FORBES RETIREMENT FUND

2 ALEXANDER FORBES RETIREMENT FUND CONTENTS A HEAD START TOWARDS A COMFORTABLE RETIREMENT 1 THE AIM OF THE INVESTMENT STRATEGY 2 THE INVESTMENT STRATEGY IN MORE DETAIL 2 INVESTMENTS: WHAT YOU NEED TO KNOW 3 THE ALEXANDER FORBES LIFESTAGE MODEL 5 SETTING YOUR OWN INVESTMENT STRATEGY 7 SWITCHING PORTFOLIOS 8 ANY QUESTIONS? 8

3 MEMBER INVESTMENT CHOICE A HEAD START TOWARDS A COMFORTABLE RETIREMENT As a member of the Alexander Forbes Retirement Fund you have been given a head start in achieving a comfortable retirement. But it s not something you should take for granted. You will need to manage your money in the fund in the best possible way while you are working. So, the purpose of this booklet is to give you the information you need to take responsibility for your retirement money. A FEW THINGS TO THINK ABOUT You are never too young to start planning for your retirement in fact, the earlier you start, the better. Very few South Africans retiring at 65 will have saved enough money for a comfortable retirement. With this booklet we would like to assist you with your investment decisions, so that you can plan for your retirement. You need to think about: How much money you ll need at retirement? How to save enough money to be able to retire? A good guide is to save enough money to give you an income in retirement of between 60% and 75% of what your final salary before retirement would be. In general, this amount is regarded as enough because: You will get bigger tax rebates after age 65. You won t have to save for your retirement anymore. You should have paid off your biggest debts (like your house and your car) by the time you retire. HOW MUCH IS ENOUGH? How much you need depends on when you retire. If you retire earlier, you will need more money because you will probably live a long time after you retire. Also, you will have had less time to save. HOW CAN YOU SAVE ENOUGH? To retire comfortably you need to start saving when you re young and keep saving every month while you are working. It is important to avoid spending your retirement savings every time you change jobs. It is better to transfer your withdrawal benefit to another employer s retirement fund, a preservation fund or a retirement annuity fund. This is because smaller investments made early on in your life and saved over time, can make a big difference in the final amount of your retirement savings. These examples show you the power of compound interest. They also show you the damage you do to your retirement savings if you take your savings as cash when you change jobs instead of saving it for your retirement. Example An investment of R1 000 at age 30, earning 10% interest each year, will have grown to R by age 65. If you waited to age 40 to save this amount, you ll have to invest R2 594 (more than twice as much) to grow to R by age 65. If you waited to age 50 to save this amount, you ll have to invest R6 727 (more than six times as much) to grow to R by age 65. GOOD ADVICE Best advice for people who are employed is to make sure you start saving early for your retirement, do so consistently over your working life and try to reinvest or save your withdrawal benefit when you leave the fund. 1

4 ALEXANDER FORBES RETIREMENT FUND THE AIM OF THE INVESTMENT STRATEGY The aim of the fund s investment strategy is to target an income in retirement that can provide you with between 60% and 75% of your final fund salary before retirement, assuming you contribute between 17.5% and 18% of your salary to the fund over the 40 before you retire. The investment strategy set by the trustees recognises that to achieve this, you need to: 1. Have a higher exposure to shares (equities) when you are younger, as they are likely to be the bestperforming investment compared to other assets over longer terms, but with admittedly higher shortterm volatility. If you are a younger member of the fund, you will probably be an investor for many before you retire and can therefore tolerate short-term market volatility to try to get higher longterm investment returns. 2. Better manage your risk by spreading your risk across all types of investments (see next page for a look into the different types of investments). 3. Have less exposure to shares as you get closer to retirement when you will probably want less volatile investments. This is what the Alexander Forbes LifeStage Model aims to do! THE INVESTMENT STRATEGY IN MORE DETAIL As a member of the Alexander Forbes Retirement Fund you have member investment choice. This is quite different to how retirement funds worked in the past, where members were not generally given the chance to choose investment portfolios best suited to their personal needs and circumstances. WHY OFFER A CHOICE? Your fund recognises the importance of the individual and the fact that a one-size-fits-all approach is not always right for something as important as your retirement savings. Choosing your own investment portfolio within the fund can bring its own set of challenges, risks and rewards it s important to think carefully about where your money is invested. You can choose to invest in the Alexander Forbes LifeStage Model regardless of the default investment strategy your management committee chooses. The Alexander Forbes LifeStage Model may be an appropriate choice for you, even if you are comfortable choosing your own investment portfolio. If the model does not meet your needs, you can choose to invest in a range of other portfolios. Definitions Withdrawal benefit: This is the money you will get from your fund when you leave your job (whether you resigned, were retrenched or dismissed). Retirement benefit: This is the money you will get when you leave the fund when you retire. Annuity: A pension that you can buy from an insurance company using your retirement benefit. Investment: An investment is an asset bought to generate income over time, or grow in value so it can be sold at a higher price at a future point in time. Preservation fund: A savings vehicle for your withdrawal benefit. You can t contribute to a preservation fund, but you can transfer all your savings from a pension or provident fund to a preservation fund to save your benefit, instead of taking cash when you change jobs. Compound interest: This is when you earn interest not only on the capital (initial amount invested) but also on interest already earned. Volatility: The tendency of the value of an investment to go up or down over short periods of time. 2

5 MEMBER INVESTMENT CHOICE INVESTMENTS: WHAT YOU NEED TO KNOW This section takes you through the different investment concepts you need to know and understand to be able to make an educated investment choice. 1. THE MAIN TYPES OF INVESTMENT THAT MAKE UP THE PORTFOLIOS The portfolios you can invest in use different amounts of the following main types of investments to spread the risk (diversification): Cash Fixed interest/bonds Shares (equities) Type of investment (asset class) Cash investments are where you put your money in the bank and the bank pays you interest. You invest in cash when you need a secure return and when you cannot run the risk of the value of your investment decreasing. With bonds you lend money to the government, a parastatal or a large company that agrees to pay you interest on the amounts loaned. They also agree to give back your capital (initial investment) at the end of a pre-determined period. You would invest in bonds because bonds are less risky than shares, but more risky than cash. They also generally give better returns than cash over a longer period. Shares are where you buy a part of a company. As a shareholder, you may share in the profits of the company (dividends). This is your portion of the distributable profit that the company makes. The value of a share can be seen by reading the prices quoted on the Johannesburg Securities Exchange (JSE). These are the prices at which the shares were bought and sold and are determined by the amount people who are willing to pay or get to buy or sell their shares on the open market. Volatility and investment returns Cash is generally considered the safest type of investment because the value of your investment will not drop. However, long-term investment returns on cash are usually lower than those achieved by other types of investments. Bond values can change quite quickly because the value depends on interest rates. The value of the investment depends on current interest rates, with bond values typically increasing as interest rates drop and dropping as interest rates go up. Although bonds experience volatility, they are usually less volatile than shares. The value of shares can change often and quickly compared to other types of investments. Shares are seen as very volatile. They tend to give the best investment returns over the long term. In the past, shares have given the highest investment growth over the longer term. That s why they are a good investment for your retirement savings if you still have a good few until you retire. However, over shorter periods of time, shares can drop in value. 2. DON T KEEP ALL YOUR EGGS IN ONE BASKET Not many people invest only in shares, only in bonds or only in cash. They usually invest in different combinations of types of investments (asset classes) to reduce their dependence on the returns of any one type of investment at any time. Putting your money in different types of investments is known as diversification. Why diversify? Different types of investments don t behave in the same way at the same time. By spreading your investments across different types of investments, you can: Reduce your dependence on the returns of any one type of investment. Offset any losses made on one type of investment by the gains on another. Reduce the overall risk of your portfolio. Increase the expected return on your portfolio. The portfolios you can invest in are diversified The portfolios you can choose (including portfolios that make up the default portfolio) invest your money in a combination of all of the different types of investments. They also invest overseas. This means that all the portfolios invest in shares, bonds, cash and a number of other types of investments inside and outside South Africa. This means the portfolios are properly diversified. To protect your interests, the Pension Funds Act also limits how much of a retirement fund s 3

6 ALEXANDER FORBES RETIREMENT FUND money can be invested in each of the different types of investments. This ensures that the portfolios are: Invested across different types of investments. Not invested too heavily in one particular type of investment. Not too exposed to the volatility of any particular type of investment. 3. KEEP YOUR EYE ON INFLATION Inflation eats at the value of your money. Because of inflation, a rand will buy less in the future than it does today. If your investment does not give returns higher than inflation, the real value of your money will decrease over time. The first part of your investment return always goes towards beating inflation. Only once your investment return beats inflation does the real value of your investment begin to increase. Shares can protect against inflation Over shorter periods of time shares can grow by less than inflation because of volatility. It will be impossible to save for a comfortable retirement without shares because it would simply be too expensive. When you are not making enough money from investment returns, you need to save more each month or over a longer period of time to achieve the same objective and this may not be possible for most people. Shares should always be part of your retirement planning. The trick is to stay invested for the long term riding out volatility and participating in longer-term investment returns that are expected to beat inflation. Don t let your fears get the better of you and invest in cash just because the markets are unstable. If you do, you might be reducing risk, but you will also lock in your losses. 4. KNOW WHEN TO INVEST IN CASH Cash is too conservative if you are investing for a long time. Use cash at the right time and for the right reasons. There are advantages and disadvantages to having a large part of your investment in cash you can use it to diversify your portfolio. Also, if you want to balance an aggressive share investment, holding cash may be a good option. If you have a low risk appetite, you may want to invest more in cash, but you need to understand that this conservative approach will seriously limit your growth over the long term. Many people who get closer to retirement age put all their retirement savings into cash or bonds. The problem with this is that you could still live for another 20 to 30 after you retire. This means you ll need to stay invested in non-cash assets for longer to avoid running out of money in retirement. If you are a long-term investor and you are invested in cash, the value of your investment will not grow by more than inflation over time. Inflation: The rate of increase in prices. Consumer price inflation refers to price increases measured by the consumer price index (CPI), which reflects changes in the prices of a basket of goods and services. Investment return: The profit or loss made from investing your retirement benefits. The higher the investment returns, the higher the benefits you will eventually get from your fund. Investment returns can go down over short periods of time, in which case the value of your benefits will decrease. R CASH VS BALANCED/DIVERSIFIED PORTFOLIO R R This is what I would get if I invested in other investments! R R5 000 This is all I would get if I invested in cash only! Age This graph shows the effect of investing in cash only compared to the return you could get from investing in a portfolio made up of shares, bonds and cash. 4

7 MEMBER INVESTMENT CHOICE THE ALEXANDER FORBES LIFESTAGE MODEL Each type of investment has its own risks and rewards. The goal of any actively managed investment portfolio should be to meet or do better than the expected risk and returns that the managers set out for that investment portfolio. Risk is often measured by how much and how quickly an investment s value is expected to go up or down in the short term (a period of less than a year). If an investment s value is likely to lose or gain value quite quickly over short periods of time, it is known as a volatile investment. Putting your money into a volatile investment is a problem if there is not enough time for the value of the investment to recover, like when you are older and closer to retirement. That s why younger people, who will be investing for a long time before they withdraw their funds, can withstand more volatility (markets going up or down). Younger people typically have more money invested in shares as part of their portfolios to hopefully get better investment returns over the long run. THE ALEXANDER FORBES LIFESTAGE MODEL The Alexander Forbes LifeStage Model assumes that members close to retirement will want to be invested in safer portfolios to protect and lock in the value of their retirement savings, while younger members can take on more risk to hopefully earn higher returns. The Alexander Forbes LifeStage Model automatically moves your money from a higher exposure to shares when you are younger to lower and lower exposure to shares as you get closer to retirement age. Your money will be switched as you reach the specific age bands set out in the Alexander Forbes LifeStage Model. The key elements of the Alexander Forbes LifeStage Model are: A growth portfolio for younger members. A gradual transfer of retirement fund assets over time from the growth portfolio to the conservative portfolio. The benefits of the Alexander Forbes LifeStage Model are: Your money is automatically moved from more volatile investment portfolios to less volatile investment portfolios as you get older. Switches between portfolios are gradual and staggered, which means that you are not dependent on market conditions on any single day. Switches take place as part of an overall strategy and not as an attempt to time the investment markets. You will remain 100% invested in the High portfolio until seven before your normal retirement date. After this, the Alexander Forbes LifeStage Model will automatically switch your money from one portfolio to another over time as follows: >7 6 to 7 5 to 6 4 to 5 3 to 4 2 to 3 1 to 2 <1 year 100% AF High High Bold AF High/ Medium High/ Medium Bold/ Moderate AF High High Bold 100% AF High/Medium High/ Medium Bold/ Moderate AF Medium Medium Moderate AF High/Medium High/ Medium Bold/ Moderate 100% AF Medium Medium Moderate AF Medium/ Medium/ Moderate/ Cautious AF Medium Medium Moderate AF Cautious AF Medium/ Medium/ Moderate/ Cautious 100% AF Cautious Preparing for retirement Protecting Your fund credit is transferred between portfolios at the end of your birthday month. 5

8 ALEXANDER FORBES RETIREMENT FUND This graph shows the risk profile of the Alexander Forbes LifeStage Model: 100% 90% 80% Safer Riskier 70% 60% 40% 30% 20% 10% 0% >7 6 to 7 5 to 6 4 to 5 3 to 4 2 to 3 1 to 2 <1 year Years until normal retirement age Much time and research has gone into this investment strategy to make sure it is the most suited for the average fund member, taking into account their risk and return objectives and associated investment time horizons. You can choose to invest in the Alexander Forbes Specialist LifeStage Model, the Alexander Forbes Balanced LifeStage Model or the Alexander Forbes Passive LifeStage Model regardless of the default investment strategy your management committee chooses. Here is an explanation of each type of LifeStage Model: Specialist: The amount invested in each type of investment is fixed. Investment managers are chosen for their expertise in investing in each type of investment and there are different investment managers investing each type of investment. Balanced: The amount invested in each type of investment is not fixed. Investment managers are chosen for their expertise in deciding which type of investment to invest in. The same investment managers invest each type of investment in the percentage that they think is best, taking into account investment conditions. Passive: The amount invested in each type of investment is fixed. The portfolios invest in different indices for each type of investment. This is a lower cost option. 6

9 MEMBER INVESTMENT CHOICE SETTING YOUR OWN INVESTMENT STRATEGY If the Alexander Forbes LifeStage Model is not suited to you, or your needs change, the fund allows you to set your own investment strategy. You can choose to invest in a range of portfolios selected by the trustees. You will find more detail about the portfolios available to you in the Investment Portfolios in More Detail brochure. You can switch between portfolios at any stage and at no cost. TIPS TO FIND A GOOD FINANCIAL PLANNER It is important that your financial adviser complies with the guidelines of the Financial Advisory and Intermediary Services Act, which governs best practice and sets out service excellence guidelines for brokers, insurers and intermediaries. A few pointers: Ask financial advisers what their qualifications and credentials are. Find out what the financial adviser s services include. It is important to get regular feedback. The financial adviser must be able to get many different solutions for you from different companies and not force you into any one solution. If you want to make your own investment decisions, please read through the following section carefully. GOOD INVESTMENT ADVICE Start investing early The younger you start, the longer you ll be invested and the greater your long-term growth is likely to be. Stick to your long-term strategy Be careful of trying to time investment switches with the performance of investment markets. Make switches based on your investment plan, not on how you are feeling on a particular day. Markets are volatile Accept that share prices can change dramatically and often. The pay-off is that they provide good growth opportunities over the longer term. Markets recover Realise that markets go up and down, but recover over time. Be realistic Consider what a good return is. Invest in shares To get long-term real returns that beat inflation you need to invest in shares. Consider your investment time horizon If you have less than five until retirement, capital risk becomes important as you move towards protecting your investment. When you are younger you can invest in more volatile investments because you can recover from short-term losses before you retire. WHERE DO YOU START? Investing is not easy, especially when it comes to investing for retirement. With so much different advice available and so many different investment strategies to choose from, it can become difficult to make the right choice about how best to protect and grow your money. Investment portfolios can be grouped according to the objectives that they try to achieve. For example, some portfolios aim to grow your money while you are younger so their portfolios are suitable for when you re preparing to retire. There are also portfolios that are suitable for protecting your money before you retire. YOUR OBJECTIVES Remember: there is no one-size-fitsall solution. You should develop an investment stategy that is right for you, using the following three components: Your objective Your limits Your investment time horizon Experts say that when investing for retirement, your objective should be a pension that will give you an income of between 60% and 75% of your final salary at retirement. YOUR LIMITS You need to identify your constraints and parameters. These are the things that could affect your ability to reach your goals and objectives. These limits include: Risk tolerance The risks you are comfortable with and that have an effect on the type of investment you would like to put your money in. Performance expectations You may have a specific target in mind and this may be unrealistic given your own personal risk tolerance. You should begin to develop your personal investment strategy with an understanding of risk and how it affects your objectives. Risk is normally associated with the possibility of getting back less than the amount you first invested and this may lead you to be too conservative. Probably the greatest risk is that of retiring with too little money because your investment strategy was too conservative. This is actually a far greater risk than the risk of share markets going down over the short term. Over the long term share investments are expected to give the best growth of all types of investments, so don t shy away from shares for fear of market volatility because you could seriously limit your ability to retire comfortably. MAKING YOUR CHOICE Your retirement fund benefit could be one of the largest assets that you will ever own. It could mean the difference between a comfortable retirement doing all the things you are looking forward to doing when you are retired or one of just making ends meet or even worse. Make sure you start to plan for your retirement as early as possible and get appropriate advice as you make your plans. 7

10 ALEXANDER FORBES RETIREMENT FUND SWITCHING PORTFOLIOS You can change your investment strategy at any stage and at no cost. You are allowed to switch at any time. Your switch will be made within five working days of receipt of a valid instruction. Remember that it is your responsibility to choose the investment option that best suits your objectives and your lifestyle. You need to choose carefully, because the decision you make will have a huge effect on the amount you will get when you retire or change jobs. Alexander Forbes will give you confirmation of receipt of the instruction when we receive a valid switch instruction and we will send you confirmation of the switch once it has been made. You must make sure you get these confirmations. ANY QUESTIONS? If you need more information about your choice, please contact one of your management committee members or an Alexander Forbes consultant. Your human resources department should have their contact details. Otherwise call the Alexander Forbes Investment Advice Centre on For general information about your fund call the Alexander Forbes Retirement Fund Call Centre on Please refer to your member booklet for more information about your other fund benefits. Fax your switch form to: (South Africa) or (International). You can also it to zzswitches@aforbes.co.za 8

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12 HEAD OFFICE SANDTON Alexander Forbes, 115 West Street, Sandown PO Box , Sandown, 2146 South Africa tel: International tel: South Africa fax: International fax: PRETORIA Alexander Forbes House, 189 Clark Street, Brooklyn, Pretoria PO Box 2435, Pretoria, 0001 South Africa tel: International tel: South Africa fax: International fax: CAPE TOWN Block A, The Boulevard, Searle Street, Woodstock, Cape Town PO Box 253, Cape Town, 8000 South Africa tel: International tel: South Africa fax: International fax: STELLENBOSCH 40 Dorp Street, Stellenbosch PO Box 501, Stellenbosch, 7599 South Africa tel: International tel: South Africa fax: International fax: DURBAN Alexander Forbes Place, 10 Torsvale Crescent, Torsvale Park, La Lucia Ridge Office Estate, La Lucia PO Box 782, Umhlanga Rocks, 4320 South Africa tel: International tel: South Africa fax: International fax: PORT ELIZABETH 256 Cape Road, Newton Park, Port Elizabeth PO Box 27972, Greenacres, 6057 South Africa tel: International tel: South Africa fax: International fax: EAST LONDON 1st Floor Short Mill House, Quarry Office Park, Quartzite Drive, Selborne, East London PO Box 19367, Tecoma, 5214 South Africa tel: International tel: South Africa fax: International fax: Written & Designed by Alexander Forbes Communications Alexander Forbes Life Limited is a registered financial services provider (FAIS 1178.) Copyright in this material is expressly reserved and remains the exclusive property of Alexander Forbes Life. This document and any attachments may not be altered, copied, stored, retrieved or in any way reproduced without the express written permission of Alexander Forbes Life. Breach of copyright is a serious offence and can lead to litigation. Photos from: and