A simplified, managed retirement solution

Only a third of retirees are drawing an income from their living annuities at sustainable rates below about 4% to 5%, the safe zone. A third are drawing significantly higher than a sustainable rate and can unfortunately expect their living annuities to fail quite quickly, the danger zone. And there is a third that draw an income at a rate that is too high, but is still below guaranteed life annuity rates, the risky zone.

Research by Just SA shows that this last third of retirees in the risky zone should invest at least a portion of their retirement savings in a guaranteed life annuity to secure a long-term sustainable income.

The new, managed solution with MitonOptimal is aimed at these retirees in the risky zone, who need to minimise their drawdown risk and improve the sustainability of their income.  This can now be achieved by selecting from a number of model solutions that allocate a portion of their savings to a guaranteed life annuity.

Essentially, it blends a guaranteed life annuity and a MitonOptimal model portfolio of unit trusts within a living annuity. This structure gives retirees one income stream, instead of two, which they would have if they were invested in separate life and living annuity products.

Over the years the local investment market has become extremely complex and DFMs have simplified the daunting task of fund and manager selection for advisers. Solutions have however typically been similar, whether their clients are investing for retirement in a pension fund or retirement annuity, or if they are in the decumulation or drawdown phase of their retirement journey.

But now, using Just SA’s research and expertise, MitonOptimal has launched a blended solution that incorporates a liquid portion invested in a model portfolio, as well as guaranteed life annuity portion specifically for clients in retirement. However, the question becomes how much of a given client’s retirement capital should be invested in each.

To help advisers, MitonOptimal offers three tailored blend options. The first has 20% of capital invested in a life annuity, the second has 40%, and the third has 60% invested in a life annuity, with the remainder invested in the MitonOptimal risk-profiled model portfolios.

Deciding which of the three blends to choose has also been simplified to three broad questions, namely:

1.         What is your investment risk profile?

2.         How old are you and what is your current drawdown rate?

3.         Do you have a spouse and are they dependent on you?

The hurdle for many advisers and clients is that blending, and how much to blend, can be a complex discussion. As a result, clients can become overwhelmed and decide to leave their money in a living annuity ‘for now,’ with the idea of revisiting this ‘one day.’  Clients in the risky zone who delay this decision too long often continue to draw at unsustainable rates and run the risk of their living annuities failing in the future.

Now, by adding a guaranteed income within a living annuity portfolio, as MitonOptimal and Just SA have done, retirees and their advisers can simplify the discussion and have a higher certainty of a sustainable income for life and enjoy a better standard of living in their golden years.