Retiring at the end of the year?

At 10X Investments, we’ve helped thousands of South Africans retire better.

We’ve learned that some decisions are easier to make than others – and that if people can avoid thinking about difficult things, they generally do.

But hope isn’t a strategy, and you can’t afford to stick your head in the sand when it comes to the major influences on your quality of life in retirement.

So let’s get them out in the open, so you can get comfortable with the choices you’re going to have to make.

Living annuity vs guaranteed annuity vs a combination

Legally, your accumulated retirement savings must be used to purchase a pension in the form of a living annuity, a guaranteed (aka life) annuity or a combination of both. This is a decision anyone with retirement savings has to make, so it makes sense to start here.

A living annuity gives you flexibility, keeps your money invested, and perhaps most importantly, can be left to beneficiaries outside of your estate. A guaranteed annuity, by contrast, removes your responsibility for making investment decisions and your income stays constant regardless of what the markets are doing.

For some people, it may be a case of one or the other, but an option that is gaining popularity is taking advantage of both.

You might consider using some of your retirement savings for a guaranteed annuity, to be sure of covering some of your bigger costs. You could then invest the rest in a living annuity to take advantage of income flexibility (and to have something to leave your loved ones).

A living annuity can be converted into a guaranteed annuity at any time, but not the other way around. That means putting at least some of your savings into a living annuity to start isn’t as risky as it might seem.

Either way, what you get for your money is going to be a big consideration. And you shouldn’t be left guessing. Speak to a 10X retirement consultant at no cost to you, no strings attached, or do a comparison report for free.

How to keep your retirement income sustainable

 Let’s assume you opt for a living annuity.

There are four key areas to understand that will give you a better shot at a more comfortable retirement.

Fees – the cost of your investment should be as low as possible

We’ve had clients whose living annuities cost them more than their medical aid! They weren’t aware of this because they didn’t see their living annuity fees as direct debits on their bank statements. Those fees are deducted from their investment capital before their monthly drawdowns are paid into their bank accounts.

What to do: Understand what you’re paying as a rand amount every month. You might have to hunt for this number by requesting your Effective Annual Cost (EAC) from your provider or broker. Do it; it’s worth the time. If you’re paying more than 1% total for your living annuity, get a free comparison report. You could be saving more than you think by switching to a lower-cost provider. Switching is easier than you think, and usually all taken care of for you by the new provider.

Understand the golden equation

 To ensure the sustainability of your retirement income (and give you the best chance of not running out of money as you get older), understand that the sum of your fees, inflation and drawdowns should be equal to or less than your return on investment. We call this the ‘golden equation’, and written out, it looks like this:

Fees + Inflation + Drawdowns ≤ Investment Returns

You don’t control inflation, and returns can be good one year and not so good the next, regardless of the fund you’re in.

What to do: You do control your fees and how much you draw down. A sustainable drawdown is usually between 4% and 5%. Make sure you understand the inputs for your personal equation, and read more about sustainable drawdowns here.

Get your asset allocation (what you’re actually invested in) right

When you invest with a living annuity, your money is put into a fund (or funds). The onus is on you to ensure that the fund’s investment goals align with what you need from your money.

If you want your money to grow, are happy to ride out some ups and downs in the shorter term and can draw sustainably from it during this time, a high-growth, equity-heavy fund might be a good option.

If you’re happy to accept lower growth potential in exchange for lower risk, a more defensive income fund might be worth considering.

What to do: Make sure you’ve really thought through what you want your money to do, and over what time period. You don’t want to expect growth and see none.

Explore alternative income streams before retirement

Many retirees rent out a flat on their property, have a small home-based business, or work part-time for someone else.

Furthermore, many have discretionary investments they can draw on in retirement. There is a very good reason to explore more income streams before retiring, beyond the obvious one of having more money, but you might not have heard of it. Here it is:

Two people can retire with the same amount of money, earn the same average return over 20 years, and still end up in very different positions simply because of the order in which those returns arrive.

This is known as ‘sequence of returns’ risk.

If a market downturn hits early in retirement while you are also drawing an income, you may have to sell investments at lower prices to fund those withdrawals. That locks in losses and leaves less capital invested when markets recover, which can have a much bigger long-term effect than a similar downturn later in retirement.

What to do: If you can manage it, have other sources of income on which to lean. This will minimise the impact of drawing from your investments in the early years of retirement.

Take charge and change what you can

To sum everything up, when it comes time to retire or think about retiring, consider these key steps:

Understand the living annuity vs life annuity options thoroughly
Calculate your essential monthly expenses, and reduce investment and other costs
Make the right investment choices, and speak to a professional if you need a sounding board
Use a Living Annuity Calculator to understand how much income you can sustainably draw from your retirement savings

The comfortable retirement you deserve is about more than reaching a specific rand value. It’s also about creating a sustainable financial strategy that works for your unique situation. Check out 10X Investments, the retirement investment specialists, to learn more.

Carl Thomen is product marketing lead at 10X Investments.

The content herein is provided as general information. It is not intended as, nor does it constitute, financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). The 10X Living Annuity is underwritten by Guardrisk Life Limited.

Brought to you by 10X Investments.

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