Which is a better option for a 71-year old: fixed deposit or stick to unit trusts?

I am retired and live on a pension generated by two investments in unit trusts (one R28 units and one flexible investment). I have been investing in unit trusts since 1999. My unit trusts have taken a beating, first by the Steinhoff affair and even more seriously, the Resilient debacle. Equities have also been more than disappointing.

My question is, which is the better option at my age: fixed deposit or stick to unit trusts? I can get a one-year fixed deposit at 8.73% – some of my trusts since mid-December have not been close to that; in fact, many have devalued and are looking horrific. I do have an overseas bank account and have even thought of depositing the money there, hoping that the rand devalues. I have asked a finance person about all this, but have no real advice. Perhaps you can assist?

I am 71. Retired six years ago. No bond. No debt. Economical living. My pension is self funded – one fixed deposit, one annuity (small), one flexible investment consisting of bonds, flexible funds and equities, and one small foreign deposit. My flexible investment has taken a big knock and I am very worried as I am now digging into my capital. I’m thinking of doing away with unit trusts and safeguarding my capital in a fixed deposit. I have put my cluster on the market and am looking for a two-bedroom unit, and am considering investing the difference.

Your frustration with the recent performance of your investments is quite palpable. The best way to get to the right answers is to ask the right financial-planning questions, beginning with:

What is your total investment capital?
What is your total monthly income requirement?
Are you happy to accept some capital reduction/depletion, and would you be satisfied planning until an expected age of 90, 95 or even 100?
These are the types of questions that enable a financial planner to make appropriate investment recommendations. Once there is a clear understanding of your income requirements, the investment timeframe can be identified and the advisor can tailor-make an appropriate investment strategy. Hopping from unit trusts to fixed interest (even when the offer is 8.73%) is not going to solve long-term investment and cashflow needs.

But let’s put these comments into context by reviewing some investment facts, using monthly data from the past 45 years (and using rolling 19-year periods):

Not once over any 19-year period have equities (represented by the All Share Index) failed to beat cash (the alternative you are considering);
In 67% of all historical periods, bonds have also beaten cash;
Not once over any 19-year period have equities (represented by the All Share Index) failed to beat inflation;
In 84% of all historical periods, bonds have beaten inflation; and
Over the past 45 years (which has included political upheaval on many occasions, recessions, booms, extreme weakness in the rand and so on), the annualised returns of the major asset classes have been:
Equities = 18%
Bonds = 12%
Cash = 11.5%
Inflation = 9.4%
From these numbers it makes sense that for anyone planning for age 90, selling flexible funds to invest in cash could be a very costly decision, very likely resulting in a reduction of capital during retirement and a lower legacy.

The outperformance of equities and bonds has always come at the price of higher volatility than cash, but this risk has clearly been rewarded. A well-diversified portfolio matched to your personal income requirements should largely shield you from further events like Steinhoff and Resilient. There are bound to be further corporate failures, as there have been in the past.

It is important to compare the quote of 8.73% for a fixed deposit with the performance of your unit trusts since December: the former is over one year, while the latter has been just six months.

One also needs to be aware of personal tax implications. The 8.73% from a fixed deposit could attract tax at your full marginal income tax rate, whereas drawing from your flexible investments will attract a lower Capital Gains Tax.

You ask about investing offshore, in the hope “that the rand devalues”. Bear in mind that, over long periods, South African equities have outperformed developed market equities measured in any common currency. This is because local equities are riskier and command higher returns in compensation. More importantly, it seems that you expect to continue to live in South Africa. In that case, your living expenses will be in rand. It is prudent to maintain one’s assets in the same currency as one’s liabilities.

Finally, it is clear that you are concerned about drawing capital … but should you be? Whether or not you wish to – or need to – make a bequest, in the greater scheme of your investment plan, drawing capital in retirement is absolutely fine. However, you might like to explore some investment alternatives with a financial planner. For example, a with-profit guaranteed annuity could be used to provide a “guaranteed income” for life and provide a level of comfort.

A good financial plan should provide peace of mind. To my mind, the answers are less about which investment will do better and more about identifying investments that are appropriate for your circumstances in retirement.

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