Considerations when securing a sustainable retirement income
After having worked for most of your life, the aim is for your retirement savings to work harder for you when you retire and afford you the opportunity to retire in comfort. To gain this comfort, you need to be equipped with the right information when structuring your pre- and post-retirement plan in close consultation with your accredited financial adviser.
At retirement, there are three broad product options in the form of an annuity that are available for allocating retirement savings. These are a guaranteed annuity; a living annuity; or a combination of the two solutions. A guaranteed annuity pays an income that is guaranteed for the rest of your life. A living amnnuity offers you the option to select the amount (between 2,5% and 17,5%) that you would like to receive from your retirement savings each year.
The primary purpose of an annuity is to provide you with an income throughout your retirement years. The flexibility that a living annuity provides is accompanied by the responsibility to manage your retirement savings to ensure that they carry you through your retirement years.
There are three factors that need to be contemplated when structuring a living annuity.
1. Consider your life expectancy
People are living longer due to medical advancements and the overall improvement of global living standards. PPS research shows that its members may live longer than the average South African. The average life expectancy of a 65-year-old South African male retiree is 77, while for the PPS member it is 9
Many have raised concerns regarding the impact that the overall improved life expectancy could have on the ability to sustain an income from their retirement savings throughout their lives. Since no one knows how long they will live, it is necessary to plan to draw from your living annuity for at least 35 years, if you are retiring at 65-years-old, to reduce the risk of outliving your savings. Although professionals tend to be more equipped for retirement compared to the average South African, they also tend to live longer and, on average, will require a bigger amount to sustain their current lifestyle during retirement. This means that they need to save more to compensate for this.
2. Ensuring that your investment portfolio is positioned for growth
A common pitfall is being too conservative when selecting unit trusts for a living annuity. Growth assets, such as equities, help to ensure that a portfolio will enable you to draw the income you need throughout your retirement years. Historically, investment man- dates with higher exposure to growth assets have experienced superior returns to those mandates with a lower proportion of growth assets over the long term. Our research suggests that to maintain a sustainable income, you should have about 60% to 70% of your portfolio invested in growth assets. Having a low exposure to these growth assets will likely impede your ability to draw a sustainable income given the likely long life you are expected to live.
The higher the allocation to growth assets, the higher the level of risk and volatility a portfolio is likely to go through. It is important to consider the amount of risk that your unit trust selection is exposed to because this could erode your retirement savings when drawing an income.
3. Selecting a drawdown that is sustainable through- out your retirement
Many people do not retire with enough savings and may not be able to draw their income at a sustainable rate, however understanding what is needed to main- tain your savings throughout your retirement remains important.
The commonly recommended retirement age in South Africa is 65. Since the likelihood of living up to the age of 100 has greatly increased, it is safe to aim to have your retirement savings last for about 35 years.
According to PPS research, members retiring at 65 and investing in the PPS Balanced Fund of Funds should consider a starting drawdown of 4% or less.
Each year, the cost of living gradually increases so it is intuitive that your income needs to increase at the same pace. If the level of your living expenses remains unchanged, then it may not be necessary to increase
your income in that year. This will improve your chances of sustaining your retirement savings. Where an income increase is needed, it is recommended that the increase aligns with annual inflation to maintain the real value of your income.
Opportunity to make your retirement savings work harde
Retirement planning and the important decision of choosing which provider to take out an annuity with, should always be made in close consultation with a qualified financial adviser.
At PPS, we offer bespoke post-retirement offerings for PPS members unique to the longevity risk they face.
It also affords them access to solutions to secure a retirement income; and offers benefits geared to bolster retirement savings. Retiring with PPS means that members can supplement their retirement
income with vested profits. In addition, they can continue earning profit allocation through the Vested PPS Profit-Share Account, when choosing PPS funds and investment solutions while gaining extra profits through benefits, such as Linking, and Profit-Share Cross-Holdings Booster.
Through the PPS Living Annuity with Lifetime Income, members can secure a monthly lifetime income that will never reduce in nominal terms, regardless of market movements and gain access to reduced on-going administration fees through the PPS Investments Family Network.