Soon to retire? Make sure you find out first!

Many of us look forward to retirement as if it would certainly be the best years of our lives. However, tossing those work boots can fill uncertainty, even terror. Andre Tuck, Senior Investment Advisor at 10X Investments, has many years of experience helping clients make the financial transition to retirement. Here he describes three challenges that many retirees face and some information to help them overcome them.

Choosing between a life annuity and a life annuity

When you retire, you are required by law to use at least two-thirds of your retirement savings to purchase an annuity, which will provide you with retirement income, that is, a pension. You can choose between two types of annuities: a guaranteed annuity (also called a life annuity) or a life annuity.

With a life annuity, the insurer pays you a fixed monthly annuity for the rest of your life. Choosing a life annuity insures you against the longevity risk (the risk of outliving your savings) as well as the investment risk (exhausting your capital too early due to an insufficient return on investments). However, you have no control over how your money is invested, nor do you have the ability to earn less or more income when your expenses change. In addition, your policy dies with you and no money passes to your heirs.

A life annuity transfers the risk and responsibility of ensuring you have sufficient income for life. In return, you get more investment and income flexibility, and your heirs inherit what is left of your capital after your death.

Choosing between a life annuity and a life annuity in retirement requires a careful assessment of your personal needs and circumstances. This is a critical decision – with implications for income tax, estate planning, and risk – so you should carefully consider your options or consult a financial advisor.

Make your savings last

Up to 80% of South Africans choose a life annuity over a life annuity because it gives them more control over their money. With that choice comes the responsibility of making sure you have enough money to fund your retirement lifestyle.

Calculating a sustainable withdrawal rate is one of the major levers to prevent you from outliving your savings. When calculating the amount of money you can withdraw as retirement income (i.e. your withdrawal rate), you need to consider your time horizon, your asset mix, and the fees you incur. you pay.

The conventional approach is to define the desired income in advance, for example using the “4% rule”. This concept is based on statistical analysis. It highlights the need for a retiree to apply a consistent spending plan that does not allow for volatile spending patterns. The idea behind this is that the investor must be able to safely spend 4% of the initial capital that he has accumulated over 30 years, since he must increase each year to account for inflation. (The scenario assumes a 60% to 40% combination of stocks and bonds. It will not be valid if there is a more conservative asset mix.) Although the rule is based on yield models historical, which may repeat itself or are in your favor that if you apply the 4% rule, you will not outlive your savings.

Longevity risk is primarily a function of your income needs versus your savings. The lower this percentage, the lower your risk. The goal is to have enough money to fund your retirement lifestyle, no matter how many years it may last.

In December 2020, the World Health Organization (WHO) reported that global life expectancy increased by more than six years between 2000 and 2019, from 66.8 years to 73.4 years. Living a long and fulfilling life is what most of us hope for, but, while many of us focus on extending life with healthy lifestyles, we place little importance on it. extra money that will be needed to fund those extra years of life.

Stay calm during market volatility

Just like any other investment in life, your retirement savings will experience periods of market volatility. While the stock market promises to boost your returns, it will also test your nerves. You need to manage your emotions during the inevitable volatility or during times of low or even negative returns.

A sharp and sudden drop in the value of your portfolio can cause you to panic and change your asset mix (or switch to a life annuity) at the worst time – when stock prices are low. If you give in to your emotions and change, you lock in your losses, with the prospect of consistently lower income down the road. To get the most out of your exposure to the equity market, you need to follow.

As a reassurance: you can probably expect to live another 20 years or more after you retire at 60 or 65, which means you still have time to recover from bouts of market weakness.

No matter how well you planned for retirement, you are likely to come across some unexpected questions or doubts. In retirement, as in all life, information is power. Educate yourself and keep asking questions until you are satisfied that you have the information you need to make the best choice for yourself.


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