Even if you are looking forward to the end of your working career the idea of retirement can be daunting. This is especially true when considering your retirement savings and is often accompanied by an instinctive fear of consuming capital and anxieties about a diminishing lifestyle. Most of your concerns will likely be addressed by a few well-informed investment decisions.
Living Annuity or Life Annuity?
Choosing between a living and a life annuity at retirement requires careful evaluation of your personal needs and circumstances. It is a critical decision with potentially lifelong consequences. The key difference between the two is flexibility.
With a Life Annuity, you are bound to a life company, which sets a predetermined income, for life. While this feels more secure, it presents its own problems. Your retirement lifestyle and resultant expenses will almost certainly not be constant. You may still be very active in your sixties and seventies, incurring travel and recreational expenses, thus requiring a higher, more flexible income initially, with a lower but more secure income later on.
A living annuity helps accommodate these realities by allowing you to choose your own investments and income. However, this flexibility brings risk and responsibility: the responsibility of making decisions that will determine the sustainability of your pension and lifestyle; the risk that these decisions fail to secure you an adequate income for life.
The big unknown here is: How long will you be reliant on your retirement income? A life expectancy table can take you only so far; in fact, you have more than a 50% chance of living longer than the table suggests. Your health, and the longevity of your parents and grandparents, may be a better guide.
To accommodate greater flexibility at the outset, and more security later on, you could consider converting your living to a life annuity at a later stage. As we age, our ability to make informed decisions diminishes, and it makes sense to take the issues of life expectancy, asset allocation and sustainable draw-down rates off the table, in exchange for a fixed, guaranteed income.
Making your savings last
Your retirement pot may have to last for a long time, possibly longer than you imagine. To make your savings last you need to give your money the chance to earn returns that outpace inflation over time, which means putting some money in the share market. Historically, this has been the most reliable way to build wealth. Doing so will most likely afford you either a higher draw-down rate, or sustain your income for longer.
There is no need to rely on expensive active asset managers to try to pick the winning stocks for you; rather own the whole market by buying into an index fund. The market beats those highly paid experts many more times than not, and the evidence shows that investors are better off putting their money in a low-cost passively managed fund.
While the share market promises to boost your returns; it might also test your nerve. You will need to manage your emotions during the inevitable volatility. A sudden sharp drop in the value of your portfolio might make you panic and change your asset mix (or switch into a life annuity) at the worst possible time, i.e. when share prices are low. This would lock in your losses, with the prospect of a permanently lower income thereafter.
Fees fees fees!
Your savings will be depleted not only by draw-downs, but also by fees. Government estimates the industry average fee for living annuity investors at approximately 2.5% (plus VAT) of the investment balance, made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management.
If you are drawing down on your LA at 10% pa, you will deplete your savings quite quickly, and paying 2,5% pa in fees won’t make much difference. But if you are drawing down prudently, at say 4% or 5% pa, an additional 2,5% in fees equals half your retirement income and will take years off your savings. It is essential that you keep your fees low, ideally below 1% pa.
The 10X Living Annuity does not charge for advice or administration and investors pay a maximum fee of 0.87% (including VAT), which reduces for amounts above R5m. One of the flexibilities you have with a living annuity is that you are not tied to a provider, so if your fees are too high you should look into switching to a low-cost provider. If you are in any doubt ask 10X to do a free, no-obligation cost comparison today: https://www.10x.co.za/campaign/fee-comparison
Taking charge: change what you can
While there is little you can do to increase your retirement pot once you have stopped working, there’s much you can do to make your savings last: a low-cost high equity portfolio can add many years of sustainable income, provided you draw down prudently.
The question then becomes – what constitutes a ‘prudent drawdown’? And how many years can you expect your desired income to last for? 10X has launched a new retirement income calculator that will help you answer these critical questions.
Ultimately, the best way to control your anxiety is to stay informed, and to control what you can, and to accept what you can’t. And, famously, to know the difference.
