DURBAN - Even if you are looking forward to the end of your working career the idea of retirement can be daunting.
This is especially true when considering your retirement savings and is often accompanied by an instinctive fear of consuming capital and anxieties about a diminishing lifestyle according to Steven Nathan, founder and Chief Executive of 10X Investments.
Living Annuity or Life Annuity?
Your retirement funds should be invested in a suitable financial vehicle. Choosing between a living and a life annuity at retirement requires careful evaluation of your personal needs and circumstances. It is a critical decision with potentially lifelong consequences. The key difference between the two is flexibility.
With a Life Annuity, you are bound to a life company, which sets a predetermined income, for life. While this feels more secure, it presents its own problems. Your retirement lifestyle and resultant expenses will almost certainly not be constant. You may still be very active in your sixties and seventies, incurring travel and recreational expenses, thus requiring a higher, more flexible income initially, with a lower but more secure income later on.
A living annuity helps accommodate these realities by allowing you to choose your own investments and income. However, this flexibility brings risk and responsibility: the responsibility of making decisions that will determine the sustainability of your pension and lifestyle; the risk that these decisions fail to secure you an adequate income for life.
Making your savings last
Your retirement pot may have to last for a long time, possibly longer than you imagine. To make your savings last you need to give your money the chance to earn returns that outpace inflation over time, which 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 income for longer.
There is no need to rely on expensive active asset managers to try to pick the winning stocks for you; rather own the whole market by buying into an index fund. The market beats those highly paid experts many more times than not, and the evidence shows that investors are better off putting their money in a low-cost passively managed fund.
Fees fees fees
Your savings will be depleted not only by draw-downs, but also by fees. Government estimates the industry average fee for living annuity (LA) investors at approximately 2.5% (plus VAT) of the investment balance, made up of 0.75% for advice, 0.25% for administration and 1.5% for investment management.
If you are drawing down on your LA at 10% pa, you will deplete your savings quite quickly, and paying 2,5% pa in fees won’t make much difference. But if you are drawing down prudently, at say 4% or 5% pa, an additional 2,5% in fees equals half your retirement income and will take years off your savings. It is essential that you keep your fees low, ideally below 1% pa.
Taking charge: change what you can
While there is little you can do to increase your retirement pot once you have stopped working, there’s much you can do to make your savings last: a low-cost high equity portfolio can add many years of sustainable income, provided you draw down prudently.
The question then becomes: What constitutes a ‘prudent draw down’? And how many years can you expect your desired income to last for? There are a variety of retirement income calculators available, including the new 10X calculator, that will help you answer these critical questions.
Ultimately, the best way to control your anxiety is to stay informed, control what you can, and to accept what you can’t. And, famously, to know the difference.