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Retirement is an emotional, not just a financial, decision

If you’re one of the many South Africans approaching retirement and having to decide what to do with your retirement savings, you may find that making that decision based purely on facts and logic is next to impossible. 

We get it.

Retirement engenders a rollercoaster of emotions that are often hard to ignore.  It can include positive emotions, like not having to endure the daily pressures of work; negative ones in the form of anxiety about your future and whether you’ve saved enough; and loss, which could be loss of a routine, work friends, a salary and perhaps a certain status or sense of identity.

Add to this the need to decide how you’ll invest your retirement savings to ensure it will last your lifetime, and possibly your partner’s too, and it’s no wonder that many people feel emotional and overwhelmed. 

One way to deal with this is to equip yourself with as much information and knowledge as possible.

At retirement, you’re allowed to take one third of your savings as cash.  The other two thirds must be invested in a financial product that generates an income.  

The main two options available are:

  • a life annuity, and
  • a living annuity

If you choose a life annuity, you’re essentially buying an insurance policy with your capital; a policy that will ensure you’re paid a certain pension for the rest of your life. The ability to provide an income to your loved ones after death is an optional extra.

If you choose a living annuity, you’re buying an investment product.  You’ll be able to have a say in how your capital is invested, and in how much of it you take as an income each year, within certain legal limits. Any capital that remains will automatically be bequeathed to your loved ones after your death.

The problem with having a say in how your living annuity is invested is that retiring doesn’t mean you’re suddenly qualified to manage an optimal investment portfolio that delivers a sustainable income and protects you against inflation, for life! You may also not be equipped for the emotional roller-coaster as your investment may experience years of good returns, followed by years of bad returns, which will affect your income. Even if you have a financial adviser to help you, the ultimate responsibility is still yours.

Then there is the fact that some retirees choose a living annuity because they haven’t saved enough. They believe that they’ll be able to make up for this down the line by investing aggressively, which a living annuity allows you to do. And they like the fact that the amount of income you can take is flexible, as long as it’s not less than 2.5% and not greater than 17.5% of your capital a year.  

Both of these are risky reasons.  Firstly, investing aggressively isn’t a guarantee that you’ll be able to grow your capital sufficiently to make up for insufficient savings.  In fact, you could run the risk of losing money, and depleting your retirement savings further.  Secondly, being able to draw up to 17.5% of your capital a year as income simply means you’re likely to run out of capital fairly quickly.

It’s generally accepted that you shouldn’t draw down more than 4% of your capital a year in retirement.  But Just SA’s research shows that many South African living annuitants are drawing down significantly higher than that. On average we find retirees are drawing down between 8 and 9%.   When you add this to the fact that people are living longer and inflation has been increasing, living annuitants are at a higher risk of outliving their savings than ever before.

For this, and other, reasons, guaranteed life annuities have made a comeback over the few years. With a life annuity, you effectively trade your retirement savings for a monthly income for the rest of your life, no matter how long you live. The amount of income you will receive is determined by the life insurance company, and depends mostly on your retirement savings, your age and your sex.  But this can be an emotional decision – to hand over your life savings – because once your money is dedicated to an income for life, you cannot change your decision. This can be a hard pill for some to swallow.

Keep calm with a blended annuity

Fortunately, there’s a solution to help keep you on an even emotional keel.

A ‘blended’ annuity provides the benefits of a living annuity and a life annuity in one. It consists of a flexible portion, from which you can increase or decrease your income (within regulation) as well as a guaranteed portion that gives you a safety net  – a level of income that you’ll be paid for as long as you live. You can also leave something for your spouse or children, depending on which option you choose.

Yes, retiring and choosing a retirement product to give you an income, on top of all the other decisions you make as you transition into retirement, can be emotionally draining – but rest assured that there is an option that can give you the best of both worlds – certainty and flexibility ­– when it comes to managing your financial resources in retirement. Speaking to a financial adviser is key when making such important decisions.

Article by Just SA Business Development Manager, Paul Truscott

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