A reader asks: should I switch my living annuity fund?

A Moneyweb reader asks:

I’m worried after investing R1 141 000 of my Old Mutual (OM) living annuity into its Global Equity Fund A in October 2017. It did fantastically over November, but started going down at month end; I’ve now lost R83 000. I only draw 4.5% income per annum from it, and must try and preserve my capital with some growth as I’m retired. Should I switch into a safe money market fund ASAP or wait for it to recover my losses?

Baraza Wealth director Angélique Visser answers:

It’s strongly recommended that a detailed retirement plan is compiled [at retirement], to ensure all aspects are taken into account and informed decisions can be taken to ensure the best possible outcome.

The plan should include the following:

A budget

A realistic budget must be compiled to determine what one’s monthly income requirements will be after retirement. Note that more funds may be required for increased medical costs and lifestyle changes.

Calculate capital requirement

The amount required monthly and the period it’ll be required after retirement will, with factors like inflation and expected investment returns, determine what capital amount you need to provide the monthly income for the chosen period.

If the capital amount is less than what you’ve provided for, consider adjusting your budget and try not to rush into retirement.

Try to work longer and/or start an income-generating hobby.

Formulate investment strategy

Retirement fund withdrawal Decide whether a withdrawal should be made from one’s retirement fund and the amount.

Currently at retirement you’re allowed to withdraw up to R500 000 without paying income tax on the withdrawal.

This amount will, however, form part of your personal estate after withdrawal.

It will also be subject to estate duty (20% rate) and not be protected from creditors.

Reserve fund

Set up a reserve fund for emergencies and unexpected life events. The norm is to have enough funds to cover monthly expenses for at least three to six months.

Select an investment vehicle

The two main products providing one with an income from retirement funds are a guaranteed annuity or living annuity.

Retirement portfolio construction

Your portfolio should be constructed based on your age, risk tolerance and income goals.

Normally it’ll be focused on income and capital preservation the older a person is.

The result may be a lower allocation in equities, which won’t give you the returns of equities, but will be less volatile and provide income for monthly requirements. This isn’t a blanket rule. Investment fees should be considered when choosing a provider.

The industry’s effective annual cost standard can guide you.

It won’t be possible to advise whether a specific investment is suitable or not for you without having gone through the entire process.