By Lise-Mari Crafford
People across the world are living longer, with economists forecasting that living to 120 is now an imaginable concept within the next decade.
“This has significant implications for retirement planning, especially given the financial and lifestyle changes associated with this milestone.
The World Health Organization (WHO) predicts that by 2030, one in six people worldwide will be aged 60 or over, and the number of individuals aged 80 years or older is expected to triple between 2020 and 2050, reaching a staggering 426 million.
A risk of outliving your savings
Given the implications of an ageing world and people living longer, there is a very real risk that investors could run out of money during retirement. If you have good health and can work for longer, delaying retirement could be a good consideration.
While it may seem difficult in practice, given that many companies in South Africa implement retirement for workers when they turn 60, they tend to look for opportunities, perhaps from a side hustle, a hobby, or consulting.
History has many examples of people who made their money after or near retirement age, because they either kept working, started their own ventures, or made money from their passion projects. While this may not be possible for everyone, embracing a mindset of postponing retirement can help you earn for longer.
Transitioning from working life to retirement
Retirement is the point in your life when you start receiving an income from the money you have saved in your retirement funds. The decisions you make at retirement will determine how much income you receive from your retirement savings and how long your money will last.
Whether you are nearing retirement or still some time away, there are various factors worth considering before you transition from accumulating retirement savings to drawing an income.
To draw, or not to draw a lump sum
Retirement funds allow you to take a maximum of one-third of the value of your investment as a cash lump sum when you retire. You will need to invest the balance in a product that pays you an income, or pension, in your retirement, like a living, guaranteed or hybrid annuity.
Choosing to take a cash lump sum has tax implications, and you need to be comfortable with this before making such a decision.
If you do choose to withdraw a cash lump sum, use it wisely. For example, you could pay off your debt, save for emergencies or use it to supplement your income through investing.
More cash upfront means less to draw later
You will need to invest the retirement savings you do not take in cash in an annuity, which will pay you an income in retirement. A living annuity pays you a regular income in retirement, while a guaranteed annuity pays you a guaranteed income for life. There are pros and cons to both.
A key feature of a living annuity is that your savings and income can grow over time, depending on the performance of the unit trust you choose to invest in. But performance of your underlying unit trust can reduce the overall balance of your investment, which puts you at risk of outliving your money.
Another benefit of a living annuity is that you decide how much income to receive from your investment, within the legal limits, which you can review once a year. Your underlying investments need to earn a return higher than inflation in order for you to maintain the buying power of your retirement income over time without excessively reducing the value of your investment.
You must also remember the more income you draw, the less sustainable your investment becomes and the greater your chances of running out of money.
Allan Gray has developed a calculator to help you get an idea of your income in retirement. By entering some estimations, you can get an idea of your starting, sustainable income in retirement.
Approaching retirement can be an overwhelming experience. An independent financial adviser can offer you holistic and personalised advice for your specific situation, which is especially important at retirement.
* Crafford is the head of Manco distribution at Allan Gray.
PERSONAL FINANCE