Decisions That Help Your Income Last Through Retirement
Retirement is your reward for the decades of hard work – and you deserve to enjoy a comfortable retirement, but the truth is that many South Africans aren’t able to relish this time because of lack of planning ahead to ensure they have enough savings to fund retirement. Therefore, being aware of your financial situation and subsequently, identifying areas that may require improvement is necessary for your post-retirement financial wellbeing.
Here are the five important decisions to help you when planning for retirement.
1. Guaranteed life or living annuity?
The two primary risks that should be taken under advisement are either: running out of savings, or your money’s buying power is negatively affected by inflation. The appropriate use of guaranteed life and living annuities – or a combination of both – can help to manage the abovementioned risks.
Guaranteed annuity: Protects you from potentially running out of savings by giving you a pre-defined sum of money for the rest of your life. The amount is determined by the insurer, generally based on your age and gender.
Advantages: Protected from drawing too much from your savings; you won’t outlive your savings
Disadvantages: Inflexible terms and conditions; your money cannot be inherited by a beneficiary or transferred to a living annuity.
Living annuity: Much more flexible terms and conditions than a guaranteed annuity. You decide how much income to draw each year within the limits set by legislation. It is also your responsibility to ensure your money lasts for the rest of your life.
Advantages: The death benefit of the investment will be paid to the appointed beneficiaries; beneficiaries may take the benefit in the form of a lump sum or transfer it to a living annuity in their own name; the money can be transferred to another living annuity.
Disadvantages: Susceptible to market risks and is not guaranteed to last for the rest of your life.
2. How to choose an appropriate draw down rate
A ‘draw down rate’ is the amount of money you withdraw from a living annuity. According to legislation, the rate ranges from 2.5% to 17.5% and so your financial goals should be taken into consideration when deciding on the specific rate. It’s a good idea to enlist the services of an independent financial advisor; he/she will be able to discuss/analyse your financial objectives with you and provide options and insight.
3. How should you allocate your assets?
The allocation of your assets is a key part of investment when choosing a living annuity because it allows for investment growth even if you’re drawing an income. A financial advisor may suggest that approximately half of your assets be invested in equities – they have the potential to give high returns over the long term but are susceptible to market fluctuations.
4. How you should account for inflation
In order for your money to not lose value, inflation needs to be understood and taken into consideration – don’t underestimate its potential negative impact. You’ll need to increase your income by inflation each year so that you’re able to afford the same goods and services as the previous year.
5. Should your draw down rate be increased annually?
Yes. It is important to review and adjust for the inflation rate on an annual basis. A recommendation of a 50% asset allocation, a 4% draw down rate, in line with inflation adjustment guidelines, has been suggested to be a successful combination for a comfortable financial future post retirement.