Looking forward to your last day at work … ever?
As some of us are hanging up the Christmas lights, a number of people around us will be getting ready to hang up their work attire for the last time. Approaching retirement is both exciting and unnerving, and soon-to-be-retirees have much to think about. Andre Tuck, Senior Investment Consultant at 10X Investments, answers a few common questions.
What are my investment income options?
Before retirement, it was up to you to build a savings pot to finance the lifestyle you wanted in retirement. After you retire, you are obliged by law to use at least two-thirds of your retirement savings to buy an annuity, which will pay you an income in retirement. There are two types of annuities you can choose from: a guaranteed annuity (also known as life annuity) or a living annuity.
What’s the difference between a living annuity and a guaranteed annuity?
A guaranteed (or life) annuity is an insurance-type product, where the insurer pays you a specified amount every month for the rest of your life. While this insures you against longevity risk (the risk of outliving your savings), it comes with a few limitations. These include not having any control over how your money is invested and not having the flexibility to draw a lower or higher income. This can be inconvenient should your expenses change, or if you wanted to spoil yourself with, say, an overseas trip. Another downside is that your policy dies with you and, even though you may be able to make provision for your spouse, no money passes to your heirs.
A living annuity, on the other hand, is an investment-type product that transfers the risk and responsibility for securing a sustainable income to you. This gives you more control (and responsibility) with greater investment and income flexibility. Plus, your heirs will inherit whatever is left of your capital after your death.
How do I choose which annuity is best for me?
These products address different needs. Therefore, this decision requires careful evaluation of your personal circumstances and plans for your retirement.
There are a host of factors to consider, for example, your health, age, desired income, how much you have saved and the needs of a financially dependent spouse. You will also need to think about whether you prefer a secure or flexible income and whether you want to leave something for your heirs.
It’s important to do your research and/or consult a financial advisor to help you make the decision that’s best for you.
Can I switch at a later stage?
Legislation allows you to switch from a living annuity to a guaranteed annuity, but not the other way around. Once you have signed up for a guaranteed annuity, there is no going back.
How much income will I need to retire comfortably?
During your working life, you will probably have saved toward a specific number, i.e. your savings goal. Now that you are approaching retirement you will have a better sense of what your lifestyle costs are and can, therefore, be more precise about what you will need.
A carefully thought-through budget is always the best place to start. And what better time to refine your budget than as you reflect on the past year and look toward a new one.
Here are a few things to think about:
- Your primary goal will be to cover non-negotiable living expenses, such as accommodation, groceries, utilities and healthcare.
- You should set something aside for emergencies and other unexpected costs.
- Think of making lifestyle changes, such as trading in an expensive vehicle for a more affordable one or moving to a smaller home.
- Make sure you also budget for enjoyment, such as travel and hobbies.
How will my income be taxed?
The income you receive from your annuity (living or guaranteed) will be taxed according to the prevailing personal income tax table.
How much income would I be able to draw from a Living Annuity?
To help you work out a sustainable income (ie drawdown) to ensure that your savings last your retirement years, you should consult a planning tool such as the 10X Living Annuity Calculator, or speak to a financial advisor.
What will my annuity cost?
Few retirees realise that the fees on their living annuity are likely to be their single biggest expense in retirement. Also, that switching to a low-cost provider could boost their financial position significantly without compromising their lifestyle.
Assuming a living annuity drawdown of 5% from a R4,8 million pension pot, a retiree would receive a pre-tax income of R240,000, or R20,000 per month. At the industry’s average fee of almost 3% pa (typically made up of advice, administration and investment management fees), retirees would be paying costs of around R144,000 pa (R12,000 per month). They are paying themselves only two-thirds more than the service providers; almost 40% of the drawdown goes on fees!
Moving to a low-cost provider, such as 10X Investments, which charges less than 1% pa in fees, you could draw R28,000 a month, and pay fees of R4,000. You are now receiving seven times more than your service providers.
But drawing down at 8% per annum will deplete your savings quite quickly. It would be more prudent to keep your income unchanged and let the 2% pa saving compound within your living annuity. Depending on your choice of portfolio and future market returns, this could add 5-15 years to the sustainability of your income.
To bring this to life you can work out your own numbers using the 10X Investments’ Living Annuity calculator.
Whether you have been retired for many years or are about to embark on this next chapter of your life, have a look at your numbers and make sure that it is you that is enjoying the lion’s share of the fruits of your life’s work. It might just be the best Christmas present you could hope for.
The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. Calculations are provided for the purposes of illustration only.
10X Investments is an authorised FSP (number 28250)
The 10X Living Annuity is underwritten by Guardrisk Life Ltd.