An analytical examination of retirement strategies in South Africa

Abstract

A typical retirement strategy requires a multifaceted approach, considering various products like annuities and a well-structured investment portfolio. Balancing risks like mortality and longevity, along with factors such as healthcare costs, inflation, and tax implications, is essential for ensuring a secure retirement. Most retirees in South Africa face the challenge of either outliving their retirement savings or living below their means. Studies suggest a ‘safe’ withdrawal/spending rate of between 4% and 5%, which is below the average fund size-weighted drawdown rate of approximately 6.7% experienced in South Africa. The success rates of hybrid retirement strategies are evaluated, and the primary aim of these strategies is to enhance the overall success rate and sustainability of retirement portfolios. We assess the success rates of retirement strategies that incorporate foreign exposure by converting any gains in the S&P 500 back to South African Rand (ZAR), factoring in the exchange rate, which is modelled stochastically to simulate real-world currency fluctuations. Both US and South African inflation rates (CPI) are incorporated to ensure that success rates are evaluated in real terms, capturing the impact of inflation on retirees’ income. A core aspect of this study is the incorporation of stochastic correlation and volatility modelling. Using the hyperbolic tangent Ornstein-Uhlenbeck process, we capture the dynamic, complex relationships between relevant asset classes, enabling realistic simulations of asset behaviour under varied market conditions. We analyse the success rates and fugits1of living annuities and various retirement strategies, within a South African context.