Although we all have different circumstances, our objectives in retirement are often similar. We want the income we receive to be sustainable for life and to be enough to maintain our standard of living. Ideally, we also want our income to keep pace with inflation each year. Finally, many of us want to be able to leave something behind for our loved ones when we do pass away. There are several important questions to consider, both in the lead-up to and at retirement, which will influence whether your objectives are achievable.

Plan for a 30-year retirement

To have a good chance of your income lasting you for life, you should be planning for at least a 30-year horizon: Many people underestimate the length of time they need to plan for. As a rough rule of thumb, you should aim to accumulate 300 times your final monthly salary by the time you want to retire. This should allow you to draw an income equal to 4% of the value of your investment, and to increase your income by inflation every year over a 30-year period.

Invest for growth

Historically, retaining exposure to equities as part of a well-diversified portfolio has played an important role in growing investments ahead of inflation over long investment horizons. Whether there is merit in reducing exposure to equities in the years preceding retirement will largely depend on how you plan to structure your investments and whether you remain invested in the markets after your retirement.

Understand the tax implication of taking cash

At retirement, you have the option to take a cash lump sum from your retirement savings. Any cash you take is taxed according to the retirement tax table, which applies across your retirement savings investments and throughout your lifetime. If you are considering taking cash, it is important to understand the tax implications, which will depend on your own financial situation. Generally, accessing the first R500 000 as cash is tax-efficient and may provide valuable access to capital.

Carefully consider your annuity options

At retirement, if the value of your investment in a retirement annuity, pension fund or pension preservation fund is greater than R247 500, you are required to invest at least two-thirds of the balance in an annuity which will pay you an income during your retirement. There are different types of annuities in the market, each with their own advantages, disadvantages, and considerations. The option which is best for you will depend on your situation.

Living annuities allow you to remain in control of your investment, by deciding which unit trusts to invest in and how much income to draw each year, within regulatory parameters. You also retain the option of transferring to another type of annuity in future if you want to. On your death, any capital remaining is payable to your beneficiaries. However, with that control comes responsibility. Your income is not guaranteed to last for life and will depend on the return your investment generates and how much income you take.

In contrast, if you purchase a guaranteed annuity, the insurer issuing the policy will guarantee you an income for life. This does, however, require you to forego responsibility and control over your investment and, as a general rule, you will be unable to leave an inheritance when you die.

Investing in a living annuity

If you decide to invest in a living annuity, you are required to specify the unit trusts to invest in, which will determine the return your investment generates over time. Historically, when investing over a 30-year horizon, it has been beneficial to retain exposure to equities within a well-diversified portfolio. It has also been beneficial to invest in a combination of local and offshore assets, rather than being invested fully in one or the other. Of course, there is no guarantee that past and future returns on asset classes will be the same. Equally, one should be wary of basing decisions such as this on the most recent five-year experience only.

When considering how much offshore exposure you need, remember that many local investment managers invest offshore on your behalf. In the Allan Gray Balanced Fund, for example, up to 30% of the portfolio is invested in offshore funds managed by our offshore partner, Orbis. In addition to this, the investment managers can invest in precious metals, investments in Africa outside of South Africa and shares in South African companies which earn part or all their earnings outside of South Africa, all of which provide diversification against South African-specific risks.

Drawing an income from a living annuity

The level of income you can sustainably draw from a living annuity depends on the age at which you retire, your gender, and the expected return of the unit trust(s) you invest in. As a rule, drawing an income equal to 4% of your capital should enable you to increase your income by inflation each year and sustain it for a 30-year period.

Consider getting advice

The decisions you face at retirement are some of the most important you will make in your financial life, making this the ideal time to consider getting advice from a good, independent financial adviser. From navigating the myriad of investment options available, to figuring out the complexities of your specific financial situation, an adviser can add value by ensuring that you make informed decisions that speak to your unique needs and circumstances.


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