How to leave a positive inheritance
Many people want to leave a financial legacy for their family. For many investors in retirement, this is why they place all their money in an investment-linked living annuity.
These products pay an income from an underlying portfolio, where the investor retains ownership of the funds. Whatever’s left when they die goes to their nominated beneficiaries. But most people heavily underestimate this strategy’s inherent risk: there are no guarantees in a living annuity. If markets perform poorly or you draw too much, or both, you can empty out those savings. Investors also over-emphasise the risk of dying early on in retirement and underappreciate the danger of outliving their money.
Most people also don’t consider that their legacy isn’t guaranteed to be positive, especially if they live longer than expected.
John Anderson at Alexander Forbes says an inheritance can be negative. “You actually draw from your family.”
Anderson and Sygnia’s Steven Empedocles conducted extensive research on optimal investment strategies in retirement, with much focus on this risk. Anderson says retirees’ money objectives can be distilled into two things: having a sustainable income that keeps pace with inflation; and having funds available for flexibility, or for an inheritance.
There’s always a trade-off. The higher the income you want, the less you can set aside for other things. Some place more emphasis on a regular income; others want to pass on a legacy.
How do you balance these two requirements? It’s much more complicated than anything you face while accumulating your retirement savings. In that phase, you’re only balancing risk against return to grow your investment to a suitable level at a given point. “But in retirement you want the optimal mix of assets to provide for a given level of needs, while maximising your liquidity,” Anderson says.
Fortunately, you have the option of life annuities producing a return with a different profile. Life annuities may be the most underappreciated and underutilised tools available to SA investors."
Anderson and Empedocles’ research found they should be a critical part of any post-retirement strategy as they’re the only asset class that keep paying an income no matter how long you live. By investing a portion of funds into a life annuity you’ll also be able to invest the balance in more growth-oriented assets. This improves the chances of achieving a greater long-term return on your total portfolio.