This is the third article in a series on planning for retirement, focusing on the different phases of the journey. Our previous article looked at pre-retirement planning considerations. Next, we explore the transition phase. Future articles will cover the active phase, the passive phase, and the late retirement phase.
Transitioning from working to retirement can be both exciting and overwhelming. During this period, which typically starts anywhere from five years before you retire up to a year or two afterwards, you will face crucial decisions with a lasting impact on your financial well-being.
One of the key decisions you'll need to make is how you will invest your life savings to ensure you have a sustainable income in retirement. Who do you partner with to ensure you make good decisions? And what factors should you consider? In this article, the third in our series on retirement considerations, we go into more detail about your options and highlight the importance of partnering with a financial adviser you can trust.
Once you enter the transition phase, you start to become aware of the complex landscape of financial options. Retirement legislation requires that you invest at least two thirds of your retirement savings in an annuity – either a life annuity, a living annuity, or a blend of both. This applies whether your retirement savings are in a pension fund, a provident fund (accumulated after March 2021) or a retirement annuity (RA). It is easy to get lost in the details and intricacies of the products that are available.
If you choose a living annuity, you then have a further layer of decisions to make, including how the money in your living annuity will be invested. This means you take on the risk of making decisions that might jeopardise your retirement income. With a life annuity, which is a guaranteed income for life, the risks are borne by the life insurance company that offers it. A blended annuity is a product that combines a life and a living annuity. As such, you will have control over how part, but not all, of the funds is invested, but with the added security that your money will never run out.
When it comes to annuities, each provider has unique nuances to their offerings. This can make it challenging to compare different options and identify the most suitable one for your circumstances. A financial adviser can assist by clarifying the complexities, explaining the fine print, and ensuring you have a clear understanding of what each provider brings to the table. The adviser can help you compare the pros and cons of each, thereby enabling you to make informed decisions.
Factors you should consider before finalising your annuity and investment decisions for retirement include:
Longevity
While nobody knows exactly how long he or she will live, statistics can help you estimate your life expectancy depending on your age and gender. For example, if you are a 65-year-old male, there is a 10% chance you will live to 95, and if you’re a 65-year-old female, the same probability is that you will live to 100. Longevity has a big impact on your retirement planning. If you are choosing a living or blended annuity, life expectancy helps you and your adviser calculate how much monthly income you should be able to sustain so you do not run out of money too early.
Your risk appetite
Your financial adviser will help you assess your tolerance for risk to help determine how much of your investment portfolio should be allocated to growth assets such as equities and listed property versus more conservative investments. Your risk tolerance is essentially how well you will be able to tolerate periods where your investments under-perform. Your risk tolerance could also impact your preference for certainty over flexibility, namely the choice between a guaranteed income from a life annuity or an income that fluctuates with market movements from a living annuity.
Your income needs
What income will you need to meet your day-to-day expenses and maintain your desired lifestyle throughout retirement? A good way to do this is to start by listing your essential expenses, such as rent, food, and medical expenses, and then listing your nice-to-haves. This will help you to ascertain where you can cut down, if you must.
Inflation protection: Consider investment options that offer inflation-linked returns to ensure your income keeps pace with the rising cost of living over the long term. Or opt for an inflation-linked life annuity that offers protection against annual inflation as measured by the Consumer Price Index.
Tax efficiency
Understand the tax implications of various investment options and annuity products and choose wisely to minimise your tax liability in order to maximise your monthly income.
The transition phase of retirement in South Africa requires careful consideration and decision making as you settle into your new lifestyle and routines. With the right guidance, you can optimise your life savings and lay a solid foundation for a financially secure and fulfilling retirement, with a retirement income product to match.
* Truscott is Business Development Manager of Just Retirement Life (South Africa); ptruscott@justsa.co.za
PERSONAL FINANCE