Six key decisions when you retire
Financial planner Estian Visagie covers all the bases from how much to withdraw as a lump sum to asset allocation and choosing an annuity.
Speaking at the Alexander Forbes Planning for Retirement seminar in Stellenbosch, financial planner Estian Visagie said there are six important decisions at retirement, all interrelated.
How much capital do I withdraw as a lump sum?
Current pension fund law allows you to withdraw up to one third of your pension fund at retirement as a lump sum. The first R500 000 is tax free, with rates increasing as the amount goes up.
Though they may be able to take more, many people only take R500 000 as they don’t want to pay tax on anything above that. Visagie said this may not be the most efficient option long term.
“There may be a good reason for withdrawing more,” he said. “If the income tax you are going to pay over the long term is more than you would pay once off, this might make sense.”
Whatever you don’t take as a lump sum must be used to buy an annuity; any money paid out of that annuity will be taxed as income.
Which products do I need?
At least two-thirds of your retirement capital must be used to buy an annuity, but consider the rest of your money. Where will you invest emergency funds, for example, or can you afford to give up some liquidity to use products offering some sort of capital guarantee?
What should my asset allocation be?
Retirement’s not a single event. You’ll go through different stages, and your needs will be very different. Consider how you’ll cater for these different times.
It’s therefore important to look across your entire portfolio to understand your asset allocation, whether it’s suitable, and how it needs to change over time. This also includes considering physical assets like property.
You can’t just look at the investments. Look at your total wealth position, Visagie said.
What kind of annuity should I choose?
There are essentially two types of annuities one can choose at retirement: a living annuity (linked to an investment portfolio); or a guaranteed annuity (underwritten by an insurance company).
Living annuities have become popular as you keep control of your capital and when you die it forms part of your estate.
However, your income could be at risk if the investments perform poorly and you take the risk of outliving your money.
Guaranteed annuities secure you an income for life, but once you’ve purchased a pension, you can’t undo that decision.
If you choose a living annuity, however, you could later take that money and buy a guaranteed annuity.
Some, but not all providers, even allow you to use a portion of your capital to buy a guaranteed annuity, which can become a very useful option as you get older and insurers offer more favourable rates.
How much can I withdraw from my capital?
This is most relevant to anyone using a living annuity, but even if you purchase a guaranteed annuity, you may still have discretionary savings. How much can you afford to withdraw from this every year?
“A lot of people use the 4% rule, but the reality is that if the markets dip, that 4% could suddenly become 5%,” Visagie said. “Do you adjust your income lower if that happens?”
Nobody’s ever likely to reduce their income. So it’s important to have a long-term plan in place that will be sustainable despite market fluctuations.
How do I align my investments with how much I need to withdraw?
Bascially if you want to withdraw 10% a year as income, your capital needs to grow 10% (after fees) to allow for that to be sustainable. If you then want an inflation-linked increase on top of that, you’d have to add the inflation rate to that as well. In the current environment, that would mean you need to grow your capital at an annual rate of 16%.