CONTROL THE THINGS YOU CAN

Moving into retirement can be worrying. There is an instinctive fear of consuming capital and the prospect of a diminishing lifestyle. Fortunately, these concerns can be addressed with a few well-informed decisions, says Mica Townsend, BusinessDevelopment Manager at10X Investments. Choosing between a living and a life annuity at retirement requires careful evaluation of your circumstances. The key difference is flexibility. With a life annuity, you are bound to a predetermined income for life, which might feel more secure but, over the long term, can penalise you. You may be very active in your sixties and seventies, incurring travel and recreational expenses, requiring a higher, more flexible income to start and a lower, more secure income later. A living annuity accommodates these realities by allowing you to choose your investments and income. However, flexibility brings the responsibility of making decisions about your income, and the risk that bad decisions could mean running out of money.

Your retirement pot may have to last for a long time, so you need to give your money the best chance to earn returns that outpace inflation over time, which means putting some money in the share market.

Despite the many alternatives offered, your choice is essentially a high-, medium- or low-equity portfolio. Don’t ignore your personal risk tolerance here. There is no point investing in a high-equity portfolio for long-term growth if the stress of market volatility sends you to an early grave. While the share market promises to boost your returns, it will also test your nerve.

You may consider putting the portfolio building blocks together yourself, or you could choose to invest in a balanced multi-asset fund – the latter being the more prudent.

Importantly, don’t view your living annuity portfolio in isolation. If you have significant non-retirement savings or other income streams, you have some flexibility and can afford to take on more investment risk. The opposite is true if you live on a shoestring budget, barely covering your bills.

Your savings will be depleted by fees, as well as by what you draw. According to government estimates, the industry average fee for living annuity investors is approximately 2.5% (plus VAT) of the investment balance (0.75% for advice, 0.25% for administration and 1.5% for investment management).

If you are drawing down on your LA prudently, at say 4% to 5% pa, paying an additional 2,5% in fees will equal half your retirement income. This will take years off your savings. One of the flexibilities with a living annuity is that you are not tied to a provider so, if your fees are too high, you can switch to a provider that charges less, ideally less than 1%. The 10X Living Annuity does not charge for advice or administration, and investors pay a maximum fee of 0.87% (including VAT), which reduces for amounts above R5m.

Your major risk with a Living Annuity is that you outlive your savings. You need to consider the drawdown rate in the context of your time horizon, your asset mix and the fees you pay.

Financial planning tools such as the 10X Retirement Calculator, which you will find on the 10X website www.10x.co.za, can help you find your optimal sustainable draw-down rate, based on your estimated life expectancy and other parameters.

One of the attractions of a living annuity is that any capital that remains after you pass goes to your nominated beneficiaries (either as a lump sum or an annuity).

While there is little you can do to increase your retirement pot once you have stopped working, there’s much you can do to make your savings last: a low-cost high-equity portfolio can add many years of sustainable income, provided you draw down prudently. But, ultimately, the best way to control your anxiety is to stay informed, to control what you can, and to accept what you can’t. And, famously, to know the difference. •