How to manage your retirement income
An annuity is supposed to dispel concerns about outliving your income – but it can have its pitfalls
ONE of the most popular ways to save for retirement is with a living annuity. In 2016 a total of R333,2 billion went into annuities in South Africa, according to the Association for Savings and Investment South Africa (Asisa).
If you have an annuity, you’ll be able to adjust your average drawdown rate annually. The drawdown rate is the percentage of the invested funds you’ll be able to withdraw monthly once you’ve reached retirement age.
But many people set this rate too high, so they end up withdrawing too much each month and after a while there isn’t enough money left to cover their living expenses.
HOW TO MANAGE YOUR ANNUITY RESPONSIBLY
How much you should withdraw There are three main determining factors when working out how much money should be in your annuity investment to ensure a steady income after retirement: ▶ The level of income you choose – how much money you withdraw monthly. ▶ Investment performance – how
much your investment earns. ▶ Your life expectancy – because you’ll be withdrawing money over time to cover your living expenses. Patrick Sheehy of Sanlam Glacier says a 65-year-old South African couple in good health have a 50% chance that at least one of them will live to be 94. That means you might be needing that money in your annuity fund for a long time after you stop earning a salary.
Legally the maximum allowed drawdown rate is 17,5% of your annuity but, unless you’re one of the very few people in South Africa who has a huge retirement investment, you should withdraw far less monthly.
The available funds in the annuity depend on how much an individual has saved over the years and by how much the investment has grown, but Taryn Hirsch of Asisa says industry statistics show most pensioners are at risk of running out of money if they withdraw more than 5%. Unfortunately, most people withdraw more and in 2016 the average drawdown rate was 6,62%.
Hirsch says as soon as the drawdown rate exceeds the return on investment, the annuity’s capital base is destroyed. In other words, the more money you withdraw monthly, the quicker the investment diminishes. Do it right Research by Sanlam Glacier among retirees who manage their retirement money successfully shows that all of them sought financial advice from a professional adviser about how they should invest their money and how much they should withdraw.
And their relationship with their adviser didn’t end after the initial advice – they still consult their advisers regularly to: ▶ Discuss whether to reduce their drawdown rate while still making sure they have enough to cover their living expenses. ▶ Revise their investment strategy to check if the money in their annuity is still invested to achieve maximum growth. ▶ Consider which expenses are essential (such as food and health) and which aren’t (such as hobbies), so these can be scaled down if necessary. ▶ Make new plans as their needs
change. What to do if you’re withdrawing too much each month If possible, consider working parttime as a way to earn extra income. That way you need less of your retirement money to cover your monthly expenses.
The most important thing however would be to get sound financial advice. Talk to an adviser (go to www.fpi.co.za or fia.org.za to find a registered one). They can advise you on: ▶ Adjusting your lifestyle to live within your means. You’ll probably have to give up nonessential expenses. Ask the adviser to consider your expenses to help you budget so you can cover the essentials. ▶ Adjusting your investment to improve the return, for example by moving more of your money into shares in order to provide better returns over a longer period. This decision will depend on your risk profile. Things to guard against Beware get-rich-quick schemes. If someone offers you a return on an investment that’s considerably better than the market average it’s probably too good to be true. Fraudsters use promises of rapid investment growth to target the most vulnerable, such as retirees who are worried about their savings.