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Why you don’t stop investing when you retire
Increased life expectancy means managing your post-retirement investments.
The modern tradition of ‘retiring on a pension’ has not been practised widely for most of history, so it was what we’d now call a major disruptor when it started. Municipalities in the United States began mandating pensions for employees in certain public-service professions like teaching, firefighting and law enforcement in the mid-1800s. Germany introduced a mandatory retirement age and state pensions for all workers in 1883.
Over the next 40 or 50 years, the modern concept of workers retiring from a company at a set age and then living on a pension, which was funded by the employee, the employer and the state, became popular and was adopted in varying forms through most industrialised nations. But even though the tradition is less than 200 years old, it’s already undergone a significant change in a crucial variable: life expectancy.
Planning for longer retirements than our grandparents
When modern retirement funding was first introduced, people retiring at 65 needed a pension investment that would maintain their lifestyles over another 10 years, on average. Since then, however, life expectancy has increased worldwide. Nowadays, if you maintain health-conscious habits, you can retire at 60 or 65 and still be looking forward to 30 or more years of active, fulfilling retirement.
As a result, how you plan and manage your retirement investments has changed. The end of your working life should not be the end of your investing life. You’ll need to keep a close eye on your investments and ensure they’re providing enough income to last you your lifetime. Since you’ll be investing for the long term, there’s a strong argument for keeping the bulk of your retirement savings invested in listed equities because they offer better growth potential.
It’s a better money choice to plan for your retirement with the help of your employer, a qualified financial advisor or a retirement coach. If you invest with the right financial services provider, you won’t spend much time actively managing your retirement savings, but you must be aware of how much you have and how long it will last.
When you retire, you must place your retirement savings into a product that will pay you an income
There are 4 factors that determine whether your retirement savings will support you comfortably for the rest of your life:
1. How much have you saved?
2. How long should this amount last?
3. How much are you withdrawing every month?
4. What kind of returns are you earning on your remaining savings after fees?
Adjusting one of these variables affects all the others, so your financial advisor needs to balance the income you withdraw, the returns you get and the costs you pay, when devising a retirement investment plan to last you through your golden years.
Understanding 3 annuity options
Most of us contribute to a pension or retirement investment during our working lives, to build a savings pool to fund our retirement. When you retire, you must place your retirement savings into a product that will pay you an income. This is called an annuity, and instead of a salary from an employer, your monthly income is paid from the annuity.
The income that retirees can be paid sustainably from this annuity is often less than they expect. This is because the exact income received depends on the type of annuity. Some annuities are designed to remove the uncertainty and promise to pay you a guaranteed income for life. Others give you the freedom to choose your investments and income each year, but are not guaranteed to last.
The most common option is a living annuity. This will pay you a specified percentage of your total savings. The suggested percentage for most retirees (assuming a well-diversified, high-equity fund and fees of 1% or less per year) is 5% or less a year. However, each year you have the flexibility to amend your income (to anything between 2.5% and 17.5% of your savings).
A key feature of a living annuity is that your heirs can inherit any savings left when you die. On the other hand, your savings can also run out if you live much longer than you expect to, or you draw too much income.
A hybrid annuity doesn’t guarantee your income for life, but the chances of your savings lasting longer are much better
A life annuity is a solution that prevents you outliving your income. With this option, you’re guaranteed a predetermined income every month for as long as you live. This income is also calculated as a percentage of your total savings, but your income will continue even if those savings should be exhausted.
The less attractive feature of a life annuity is that you cannot change the amount you receive or switch to another product. In addition, unless you take the option that agrees to pay your spouse an income after you pass away for a predetermined number of years, a life annuity does not pay anything to your heirs if you die before all your invested retirement savings have been paid out.
The third option to consider is a hybrid annuity that offers you the best of each alternative, like the Nedbank Living Annuity Plus. A hybrid annuity doesn’t guarantee your income for life, but the chances of your savings lasting longer are much better. You can also change the income that you draw every year (to anything between 2.5% and 17.5% of your savings) and you can switch investments and determine how much you want to leave to your heirs.
Make your savings last your lifetime
A life annuity might offer a guaranteed income, but you hand over full control to the company you’ve bought the annuity from. A living annuity doesn’t guarantee an income indefinitely, but you have the advantage of more control over how your savings are managed and how much income you draw.
Even without a guaranteed income for the rest of your life, a living annuity can be well managed to greatly reduce the risk of your money running out. The key is to invest in sufficient growth assets, withdraw 5% or less a year and ensure fees paid are reasonable. In fact, statistics over more than 50 years show that returns from equity markets have been very beneficial to retirees over the long term.
On average, pensioners invested in a high equity portfolio (with costs of 1% or less per year) have seen their savings last for 40 years, with only the most extreme cases of market dips reducing this to 18 years. Low-equity living annuities, in contrast, are more likely to leave pensioners short of the returns they need to see them through their retirement, and on average lasted for 15 years less (all else being equal).
