Don’t draw too much money out

INSTEAD of cashing out all your retirement savings in a lump sum, living annuities allow you to draw a monthly income, which protects your capital and allows the bulk of your money to keep growing over the long term.

As retirement approaches, many investors face a myriad investment vehicle decisions: from determining the right retirement income stream to ensuring tax efficiency and longterm sustainability in consideration of inflation and compound interest.

In some cases, it is possible to cash out the entire retirement savings to fund the rest of your living years. Yet, being able to cash out the bulk of your retirement investments at 65 can create a false sense of security as the value could be perceived as high, which makes it tempting to spend too much of the cash too soon.

Many people live longer nowadays,so their money needs to stretch longer. The World Health Organization says 73 is the average age of death in 2019 – from 66.8 years in 2000.

In theory, by the time you retire, the bulk of your debt, such as a bond and car, should be paid off.

A stable solution

One way to get the most out of your investments is to draw a “monthly salary”, leaving your capital to continue growing. This is a living annuity, into which your retirement savings are paid. This also means the bulk of your money gains at a tax-free rate, although what you cash out monthly will be taxed as if it were a monthly income.

According to the Association for Savings and Investment SA (Asisa), South African retirees had R625.9 billion of their retirement savings invested in living annuities at the end of 2022 – an increase of 47.3% from the R424.8bn at the end of 2018.

Living annuities offer the choice of pulling out between 2.5% and 17.5% of your fund’s value each year, via upfront payment, or quarterly, bi-annually or monthly payment.

However, you still need to plan carefully and take the advice of a financial planner because the lump sum still invested needs to last as long as possible. At the same time, if you pull out the maximum of 17.5% each year, the value of your capital will be eroded.

It’s also vital to consider fees. According to the 10X Retirement Reality Report, 37% of South Africans surveyed don’t know how much they pay in fees towards their retirement annuities; 13% believed the fee depended on performance; while 13% believed they were not being charged at all. Over the long term, high fees significantly erode your investment growth.

Living annuities are the best way of ensuring that your investment works and grows for you.