Silver Digest spoke to Linda Blom, Business Development Manager at Glacier by Sanlam, about ways of blending different solutions for a sustainable retirement income.
WHAT FACTORS SHOULD RETIREES CONSIDER WHEN THEY INVEST THEIR SAVINGS?
- Life expectancy. With medical advances the possibility of outliving your capital becomes a real risk.
- Inflation. Your savings lose purchasing power over time
as costs go up. This can affect your standard of living. Retirees experience higher inflation rates than other consumers, mainly due to healthcare expenses. - Medical expenses. While medical aid contributions increase by more than CPI each year, this does not account for additional expenses and associated costs not covered by medical aid, which can affect your post-retirement cashflow.
- The importance of seeking expert advice. Do not make the mistake
of not doing this to save on fees. A good financial adviser can improve your investment strategy and help you reach financial goals. - Emergency savings. Unexpected expenses can take a bite out of your monthly income. Having some liquidity can help in the event of a medical crisis, when markets drop, or when regular expenses rise due to unexpected inflation.
WHAT ARE THE USUAL VEHICLES FOR PROVIDING YOURSELF WITH RETIREMENT INCOME?
- A life annuity guarantees an income until death. The risk of longevity is therefore carried by the insurer. You may add a second life insured (such as a spouse). There is also a choice of various guaranteed terms. If the life insured (or joint life) passes away within the guaranteed term, the income will be paid to the beneficiaries for the remainder of the guaranteed term. However, there is no capital legacy. Therefore, if the life insured (or joint life) passes away after the guaranteed term, there will be no lump sum available to the beneficiaries.
- The income with capital preservation plan could be a single or joint life annuity, which provides a guaranteed income for life. A portion of the income will fund the premium on a life cover policy, which pays out a lump sum at death of the last surviving life insured. This solution provides a guaranteed income for life, as well as a guaranteed capital legacy to beneficiaries at death.
- In a living annuity, your retirement savings are invested into underlying funds. The performance of these funds influences the value of the underlying investment. Poor performance or income drawdowns (the amount taken as income) that exceed returns could deplete your capital. There are no guarantees, and the risk of longevity is carried by the client. At death, the underlying value could be available as an inheritance. Income flexibility is available with a regulated drawdown between 2.5% to 17.5% per annum. A living annuity may also be converted to a life annuity later.
WHAT ARE THE ADVANTAGES OF DIVERSIFICATION?
It’s seldom that one single solution can reasonably provide for all needs. A living annuity provides flexibility and a possible capital legacy, but it doesn’t offer the security of a guaranteed income for life. A life annuity provides a guaranteed income for life but no capital legacy. A blend of different solutions provides for flexibility, longevity and capital legacy.
Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers.
