The living annuity debate
RETIREMENT OUTDATED
The retirement debate is complex. Let’s consider the broader context.
1. The traditional retirement concept is outdated
Employers may still officially require employees to “retire” at 65, but many South Africans won’t have saved enough to support themselves afterwards. This will require individuals to reinvent themselves to earn additional income to supplement their pensions. An old-school retirement savings vehicle may provide a basic income, but it’s unlikely to be enough to make ends meet.
Good health may be the pensioner’s most valuable asset, allowing them to work well into their 70s or 80s and avoid significant medical costs.
2. No investment vehicle can undo poor savings behaviour
Greater longevity has significantly increased pressure on the traditional retirement system, particularly in a low-return environment. If someone diligently saves 15% of their salary for 30 years until 65 and dies five years after retirement, there isn’t much to worry about.
But what if they live to 95? That same 15% of 360 pay cheques would have to grow to compensate them for 100% (or whatever percentage) of their last salary before retirement, for another 360 retirement income cheques (after returns, fees and inflation).
Many often cash out their retirement savings when changing jobs and may only have 15% of 120 pay cheques (or less) saved when they reach 65.
Almost 3/4 respondents in the 2017 Sanlam Benchmark Survey indicated they’d reduce their standard of living in retirement; 1/5 said they “were in trouble” as they didn’t make any retirement provision.
3. Account for the return environment and longevity
Association for Savings and Investment South Africa stats show living annuity (LA) policyholders withdrew on average 6.62% of their capital as income in 2016 – slightly more than in 2015.
This drawdown rate puts retirees at a significant risk of running out of money.
Unfortunately, the current situation may put more pressure on the “sandwich generation” – those financially supporting parents and children, thereby limiting their ability to save for their own retirement.