Balancing act of newer LAs

THIS MAKES PRODUCT KNOWLEDGE ESSENTIAL The greatest risk investors in living annuities face is the possibility their money runs out. If they don’t know they face this threat, they’re unlikely to manage their investments properly.

much as we can and invest with as much growth as we can ... a LA is very different, and it comes with different risks,” Bridge Fund Manager’s Marc Thomas said, adding that it’s very challenging to put a strategy together that accounts for how much to draw, asset allocation, what increases to take and when, and how long the money will last.

There’s also evidence that very few people understand the products they’ve chosen.

Thomas said a LA needs to pay an income and grow it above inflation. “To do that, you either have to keep growing the capital faster than you are paying it out, or you have to start giving capital back. That is a very difficult thing to manage over 30 years.”

However, investors who see this problem may be so fearful of losing capital that they invest too conservatively. They end up drawing income faster than they grow their assets, ultimately leading to the same outcome.

Coronation’s Christo Lineveldt said this is why we must appreciate the importance of growth assets, such as equity and listed property, even after retirement. “You cannot afford to not take enough risk.”

But investors must also consider volatility. Returns never come in a straight line and very poor returns at the start of your retirement can have a major long-term impact, as it’s very difficult to recover. “The more you lose, the more growth you need to make yourself whole again,” Lineveldt said. “Because people are continually drawing from their investment, they can’t have big events leading to big losses. It is a balancing act between having enough growth asset exposure and having too much, where the downside volatility is too great.”

This is why proper advice is so crucial. Critically, living annuitants must be aware of what they’re paying.