4 rules to make your income last until retirement in South Africa
Retirees who rely primarily on their life annuity investments to provide them with a steady stream of income are often haunted by the question: How do I make my income last during retirement?
“There are four rules that are essential long-term success factors for annuity investors,” said Shaun Duddy, head of product development at Allan Gray.
In the following article, Duddy shares four rules that are essential long-term success factors for annuity investors.
Rule No. 1: Plan a reasonable number of years in retirement
Duddy said planning a long retirement is very important to support one’s income.
“The risk of running out of money in retirement can be reduced with proper planning. The number of years you have to plan for essentially depends on how certain you want to be sure you have planned enough, “she said.
To give you a 90% chance that you have planned for enough years and not survive your planning horizon, research suggests that viable annuities should plan from around 40 at the age of 55 up to 10-15 at the time. age of 85 years.
Rule No. 2: investing for returns above inflation (i.e. real).
“Whenever you invest, you are trying to get the best possible returns, taking into account the risk you are able to tolerate. For an annuity this is even more important because you need to understand what level of real return is required to support the level of income required for the duration of retirement, ”Duddy said.
To illustrate this, use the following example: an investor who is withdrawing 4% of their capital and wants to raise inflation each year, and is planning a 30-year retirement, would require real returns of 2.1% per annum over 30. years, as indicated in the following table.
“In this scenario, if inflation is 6.1% a year, a return of about 8.2% a year over 30 years would be needed,” Duddy said.
“However, this picture changes significantly if you increase the withdrawal rate and / or the number of retirement years.”
So how do you go about investing your money in an annuity to maximize your chances of making your income last? First you need to make sure you have adequate exposure to growth assets. “The long-term data shows that growth assets such as stocks are essential to real returns,” said Duddy.
“You needed at least 50% exposure to growth assets, and depending on your risk tolerance, it helped to go up to 60-70%.”
Rule No. 3: manage volatility but not at the expense of real returns
Furthermore, research shows that being able to reduce volatility without (significantly) reducing real returns, or being able to increase real returns without increasing (significantly) volatility, increases the likelihood of success in a annuity.
The research further demonstrates that adding an appropriate level of offshore exposure was a good way to do this, but warns against diving headlong.
“Over the past month we have seen offshore limits revised up to 45%. Furthermore, the conflict impacting local markets such as the one in Ukraine / Russia could make investors nervous and they may wonder if they should make any changes to their asset allocation. These are important things to think about in the current climate, but the basic principles still apply, ”Duddy said.
“It was more appropriate to have at least 50% exposure to growth assets, then manage volatility through adequate offshore diversification (historically in the region of 30-50%) and through good quality active management.”
Rule # 4: Draw a reasonable level of income
With 30 years of required income, initiating withdrawals in the region of 4% to 4.5% and lower has been successful in the region of 90% and above, assuming compliance with rules 1 – 3. Beyond this interval of withdrawals, the chances of success begin to decrease.
But what if it is necessary to reduce a higher income level? What are your options?
Duddy said that in this case there are two options available: take income increases below inflation, i.e. start with a higher income level but take lower increases to compensate for this during your retirement, or consider transferring. some or all of your risk to an insurer with a guaranteed annuity.
“A guaranteed annuity offers beneficiaries a guaranteed income for life, regardless of the length of their retirement, and typically offers a higher level of initial income than what can be considered sustainable in an annuity. These benefits come at the cost of reduced flexibility and less or no benefit left to the beneficiaries in the event of death, ”Duddy said.