Retirement can be associated with a loss of position and authority as working lives end and the younger generation takes the wheel.
But, says Michael Rossouw, Senior Investment Consultant at 10X Investments, retirees have agency over a number of key factors when it comes to making their savings work hard for them and, crucially, making their savings last.
In a sense it is counter-intuitive that many of us look forward to retirement. It’s a period of significant change, which most of us don’t do that well with, especially as we get older. Retirement won’t live up to its promise for many.
It is important to remember that handing over the reins and responsibilities is one thing; letting go of your autonomy is another thing altogether. In retirement, it is more important than ever to understand what factors are within our control and focus our energy on them.
Christianity’s age-old Serenity Prayer offers a wise point of view on this:
God, grant me the serenity to accept the things I cannot change,
courage to change the things I can,
and wisdom to know the difference.
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When retirement savers reach the end of their working life they must usually purchase an annuity that turns their accumulated savings into an income for the rest of their life. They can select a guaranteed annuity, or a living annuity. The former is focused on a basic guarantee of some sort of income for life; the latter is focused on maximising savings and allowing some flexibility of investing and spending.
A living annuity allows some flexibility regarding how your savings are invested and how much you draw down to live on. Another benefit of a living annuity is that you are not tied to a provider, or a product, for life. If you are unhappy with the performance, the fees, or the service from your living annuity provider you can ‘vote with your feet’ and move your savings elsewhere.
While a living annuity allows some control over your investments and your income, it also comes with some risks, most significantly that you will outlive your savings. The upper limit of how much you may draw down as income from a living annuity is 17.5% of your capital per year. Assuming your initial draw-down grows with inflation every year, your required income may eventually exceed 17.5% of your capital. Once you reach this ceiling, your income is capped and can no longer increase to keep up with inflation, which means you risk a drop in lifestyle.
You can mitigate these risks by optimising your:
- Draw-down rate
- Asset mix
Unsurprisingly, the more you draw every year, the sooner you will run out. Ideally, you should draw no more than 4% or 5% per annum to make your money last. This should include fees. Higher fees either mean less income for you, or a higher draw-down rate on your portfolio.
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Use a living annuity calculator, such as the one on 10X Investments website, to work out what a sustainable drawdown on your savings is.
If you draw 4% pa, and pay 3% in fees, you are drawing at 7%. At that rate your money will deplete rapidly, and your living annuity provider is getting almost half of it! Fees have been shown time and again to have the biggest impact on drawdown and/or the sustainability of a retiree’s capital. There are low-cost options, such as from 10X Investments, that cost less than 1%.
The other side of how much you draw from your savings is how well your investments perform. To make your savings last longer, you need to give your money the chance to earn returns that outpace inflation over time. This means putting some money in the share market. Historically, this has been the most reliable way to build wealth. Doing so will most likely afford you either a higher draw-down rate, or sustain your required income for longer.
Your investment return depends mainly on your asset mix.
You may fear the volatility of the stock market and the risk that a market crash will significantly dent your savings, and be tempted to invest mostly in low risk assets (bonds and cash), which deliver more consistent returns than equities. But such fears are generally overblown. Historically, over periods of five years or longer, a high equity portfolio has typically delivered a better return, with less downside risk than a medium or low equity portfolio, even though the annual returns over shorter periods are often more volatile.
Research by 10X Investments shows that the average living annuity investor is best served by a high equity portfolio charging low fees. Yet the majority have the opposite: they own a medium equity portfolio at best and pay high fees.
How you manage your savings in retirement ultimately depends on your personal needs. If you are unsure, consult a financial advisor to help you make the right decision. But if you are planning for a living annuity, and are healthy and hopeful of a long retirement, the evidence suggests you should choose a low cost, high-equity portfolio.
Visit www.10x.co.za for more information on making your savings last in retirement.
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The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). 10X Index Fund Managers (RF) (Pty) Ltd is a Manager registered under the Collective Investment Schemes Control Act, 2002. The 10X Living Annuity is underwritten by Guardrisk Life