Share

Future value of a retirement annuity

(Shutterstock)
(Shutterstock)
A Fin24 user who invested in a retirement annuity (RA) fund at Coronation writes:

I am 20 years old and have entered into a retirement annuity fund with Coronation.

Not knowing all the details and perhaps entering the wrong fund, I have come to the conclusion that planning ahead isn't a waste and I am optimistic about it. (An investment into any RA can only be accessed as from the age of 55.)

However I would like to know "roughly" what it will be worth to me by the age of 55 and is the growth now any idication of future worth.

I have R60 000 invested and it has grown by 18% in one year.

Any advice on how to make the most of my situation would be appreciated.

Pieter Koekemoer, head of personal investments at Coronation Fund Managers, responds:

First up, congratulations on having the discipline to start investing early!

Compounding returns over an extended period of time is the best friend any investor can have.

If you are wondering about fund choice, the Coronation Balanced Plus is the one-stop solution for savers in a personal pension plan such as an RA.

This fund represents our best investment view for long-term investors within the constraints of the investment restrictions applicable to retirement funds.

It is unfortunately very difficult to accurately forecast returns over a 35-year period. There is just too much uncertainty that will impact the future to make definitive statements on the topic.
 
What we do know is that financial markets tend to revert to the mean and we can therefore use very long run historical returns as a starting point to forecast the future value of your portfolio.

It is also important to think in real rather than nominal returns, that is to exclude the eroding effects of inflation on your future purchasing power and to make the future value of your portfolio meaningful in comparison to today's prices.

Our best estimate for future inflation is around 6%, which is the top end of the range targeted by the South African Reserve Bank.

In addition, we know that over the last 113 years, equities (on average) returned 7.3% per year in real terms (that is ahead of inflation).

Bonds returned 1.8% per year in real terms and cash 0.8% in real terms.
 
Putting that together in the ratio that the balanced fund is typically invested, gives you a blended market return of about 5.6% after inflation, or around 12% nominal.

You can immediately see that this is less than the 18% earned over the last 12 months, so you should moderate your expectations.

If you do average 12% (nominal), you will end up with R3.2m when you are 55, but this will buy goods to the value of just more than R460 000 in today's money.

On the positive side, if we do our job as your fund manager really well and end up adding 2% outperformance of the market per year, you will have R5.9m nominal in 35 years’ time (equivalent to R890 000 in today's money).

If you are unlucky enough to experience a below average return period, earning only 4% real, you will end up with R240 000 in today's money terms.

So, in a worst case (low road) scenario you are likely to increase your purchasing power by 3.9 times over the 35 years, while in a high road scenario you may achieve 15 times the purchasing power you would have today.

I know that giving you such a wide range of answers may be a bit unsatisfying, but understand that is precisely because markets require you to embrace this uncertainty.

You have the potential of earning better returns than by keeping your money in a bank account, which will leave you with a near certain improvement in your purchasing power of only 1.4 times after 35 years.
 
I've summarised the different possible outcomes for R60 000 invested in the Coronation Balanced Plus Fund or in cash over a 35-years period in the table below:



- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.


We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.89
+0.2%
Rand - Pound
23.82
+0.4%
Rand - Euro
20.37
+0.3%
Rand - Aus dollar
12.30
+0.3%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders