How to live long and prosper

Sherwin Govender, Business Development Manager at Glacier by Sanlam, outlines some of the challenges retirees face when planning their retirement income and how a blended solution can significantly change the outcomes.

A bleak picture

Only 6% of South Africans can retire in comfort and enjoy a similar lifestyle to the one they had before retirement. Most retirees draw an income from a living annuity. The worrying trend is that 59,000 living annuity retirees saw their income halve between 2011 and 2018. In a survey conducted by Sanlam Employee Benefits, the following was discovered:

  • 85% stated that certainty about their retirement income was most important to them
  • 53% were supporting adult dependants
  • 33% still had debt.

In the last five years, the JSE All Share has not been able to keep up with inflation, and as a result, retirees have the added challenge of “sequence risk” to contend with. This is the risk of market conditions being poor in the early stages of retirement. Negative market returns in the first few years of retirement coupled with high income drawdowns will lead to living annuity retirees running out of capital later in their lives.

A 65-year old married couple today has a 50% chance of living well beyond the age of 90, and a 25% chance of celebrating their 100th birthday. This could mean that your retirement could be longer than your working life. This results in “longevity risk” which is the risk that you outlive your retirement savings.

Statistics show that the vast majority of retirees invest all their retirement savings into Investment Linked Living Annuities.

When it comes to living annuities, there are negatives and positives.

A glance at the pros and cons of living annuities  
Pros Cons
There is the possibility to leave a legacy.There are no guarantees on capital protection or income.
It is flexible in terms of income needs (the income level can be changed on an annual basis).Income levels need to be balanced against the longevity of the capital.    
It is flexible in terms of investment choice.  The individual has to deal with managing the investment markets – this is cause for stress in the life of a retiree.  
The income benefit starts off adequately. Starting income can be selected to match lifestyle needs and wants.    It is possible for the capital to be depleted, leaving the client dependent on a state pension.  

Living annuities result in financial intermediaries performing a balancing act for their clients, especially in cases where clients want a high income, flexibility and the ability to leave a legacy. The fact is that drawdowns in excess of 4.5% are going to eat into the capital, meaning that money can be depleted over the long term. Bear in mind, that the average income drawdown from a living annuity equates to 6.64% according to ASISA (Association for Savings and Investment South Africa).

Blended solutions for the best outcomes

Guaranteed life annuities mitigate longevity and market risk. However, legacy benefits from these types of products are limited. The ones that do provide death benefits come at the cost of monthly income. The most commonly used guaranteed annuity is the “level annuity” which does not provide for inflation. Inflation-linked annuities are better in the long term but the starting income is lower when compared with a level annuity.

So, what’s the best course of action? In simple terms, using the benefits of both products – giving retirees the ‘best of both worlds’.

Numbers don’t lie

Using the Glacier Retirement Income Tool, and comparing two scenarios, a solid case for combinations is evident below:

In our example, we look at the living annuity of a man retired at 59 with R3,000,000 and taking an income drawdown of 7%. A moderate investment profile is assumed here. The graph is in real terms with inflation taken into account.

Let’s consider the same client now using one-third in a 5% escalating guaranteed annuity and two-thirds in a living annuity. See the rand income comparison of the two scenarios (also in real terms) in the picture below.

It’s clear from the above that the client will be better off by combining a living and a life annuity.

The calculations were performed using the Glacier Retirement Income Planner, a tool designed by Glacier for intermediaries in their advice process.  The graphs are for illustration purposes only. Guarantee rates will vary and personal circumstances need to be taken into account. Therefore, you must consult a financial planner.

Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers



Latest


21 Sep 2020
Women are lagging in retirement savings and are debilitated by stress

In a recent study of their client base, Momentum Corporate revealed that almost half (41%) of the employees on the…

Women are lagging in retirement savings and are debilitated by stress

In a recent study of their client base, Momentum Corporate revealed that almost half (41%) of the employees on the FundsAtWork Umbrella Funds are women. With an almost 50/50 gender split across the client base, a one-size-fits-all approach to advice on employee benefits simply won’t cut it. This is according…

15 Sep 2020
Despite COVID-19, SA investors expect higher future returns

Even as COVID-19 halted the longest economic expansion on record and plunged the world into deep recession, South African investors…

Despite COVID-19, SA investors expect higher future returns

Even as COVID-19 halted the longest economic expansion on record and plunged the world into deep recession, South African investors expect to make an average annual total return of 12.67% – almost 2% higher than the global average predicted returns of 10.9%. This was revealed in the recently released Schroders’…

15 Sep 2020
Are cryptocurrencies here to stay?

The recent news that cryptocurrency giant, Digital Currency Group, has acquired cryptocurrency exchange company, Luno, has once again highlighted the…

Are cryptocurrencies here to stay?

The recent news that cryptocurrency giant, Digital Currency Group, has acquired cryptocurrency exchange company, Luno, has once again highlighted the rise of cryptocurrencies as a possible alternative to the current global financial system. According to Old Mutual Investment Group Director of Investments, Hywel George, Bitcoin, as well as a number…

10 Sep 2020
How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key…

How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key that dubbed America “The land of the free”, which stuck, to the unforgettable Mel Gibson monologue where an army of painted Scots were willing to trade their lives for the…


Top stories


10 Apr 2020
When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved…

When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved to be most enterprising in acclimatising to challenges as they arise.

13 Apr 2020
Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19…

Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19 environment and what form a global market recovery will take.

13 Apr 2020
SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The…

SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The draft Bill, together with its explanatory memorandum, provides clarity with regards the tax relief measures President Cyril Ramaphosa announced on 23 March.

11 Apr 2020
Finding investment opportunities among the many COVID-19 risks

With many countries around the world in lockdown as they try to contain the spread of the COVID-19 virus, the…

Finding investment opportunities among the many COVID-19 risks

With many countries around the world in lockdown as they try to contain the spread of the COVID-19 virus, the global economy is facing an unprecedented situation of balancing health against financial livelihoods.


Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za