What you need to know to secure the biggest income possible at retirement

by , 25 July 2018
What you need to know to secure the biggest income possible at retirement
On 18 July 2018, I told readers that buying an annuity at retirement was a more secure way to ensure you don't run out of money. Rather than taking a lump sum and managing it yourself.

Following this article, I received the following letter from G:

“Francois,

I read your email regarding retiring with R5.5 million and receiving a monthly income of R46,777 guaranteed for life.

I just don't see how this is possible unless the investment is very aggressive, which gives rise for high risk and all could be lost in the long run?

I have R5M pension invested in annuities in a very reputable retirement company and I do not receive R42,640 a month guaranteed, nor anything close to that. I just wondered at the validity of the claims?”

So, is it possible to earn this much at retirement or did I recommend a high-risk investment?

Furthermore, what is the ‘fine print' regarding the opportunity I discussed?

Today I will share with you the ins and outs of earning the biggest possible income at retirement.

What happens with your money when you retire?
 
If you had money in a retirement annuity, you HAVE to invest 2/3 of it in a Life or Living Annuity and are limited to taking only 1/3 as a lump sum.
 
But irrespective of that, unless you have very successfully invested millions during your lifetime I would suggest you stick to a Life or Living annuity instead of investing your retirement money yourself.
 
That’s the most certain way to retire sustainably.
 
So, what is a life or living annuity?

Read: Just copy this simple R10,000 Retirement Blueprint

What happens with your money when you retire?
 
If you had money in a retirement annuity, you HAVE to invest 2/3 of it in a Life or Living Annuity and are limited to taking only 1/3 as a lump sum.
 
But irrespective of that, unless you have very successfully invested millions during your lifetime I would suggest you stick to a Life or Living annuity instead of investing your retirement money yourself.
 
That’s the most certain way to retire sustainably.
 
So, what is a life or living annuity?
 
What is a Life Annuity
 
With a life annuity you give a lump sum of money to a financial institution, usually a life assurer, and in return you receive a set (or inflation linked) amount in monthly payments for the rest of your life.
 
The amount of the monthly payment is determined by several factors: the amount invested,  your life expectancy and current age, the annuity variations you select, and the actual prevailing interest rates on the day you purchase the life annuity.
 
Life expectancy becomes a factor because it is how the life assurance company determines how long it will expect to have to pay you. If you have a shorter life expectancy, you will receive higher monthly payments, and vice versa. Because of this factor, women, who statistically live longer than men do, generally receive lower monthly payments on a life annuity. It is important to note the interest rate factor, since once you purchase your annuity the rate is locked in for life, it is best to shop for a life annuity when interest rates are high.
 
The advantage of the life annuity is that you cannot "outlive" your benefits, since they keep coming until you die.
 
The main disadvantage of the life annuity is that it is based on a single life expectancy of the purchaser (and sometimes you can link it to your spouse as well).
 
Your survivors, (except for your spouse if you choose a joint survivorship life annuity) are not entitled to receive continued payments or what is left of the lump sum after you die, should you die before the calculated life expectancy. 

What is a Living Annuity?
 
The more modern alternative to the life annuity is the living annuity, sometimes also known as a flexible annuity.
 
In a living annuity instead of a fixed interest rate paid on your lump sum at the time of purchase, you are able to select from a variety of investment products (in the form of unit trusts) - that your contributions to the annuity are put into.
 
You will earn investment income on your capital and decide how much of your money to withdraw from the annuity.
 
Money left when you pass away will form part of your estate. But you can run out of money, and nothing is guaranteed, so a stock market crash could seriously hamper your income potential.

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Is a massive income possible with a conservative product like a Life Annuity?
 
So, back to G’s question…
 
Is it possible to earn R40,000+ on a R5 million investment from a Life Annuity?
 
Yes it is. Look at this link: https://www.masthead.co.za/annuity-investment-rates/ 
 
It gives typical rates at which a Life Annuity will pay you an income.
 
You will notice the annuity rate in the example is for a male born 1958 (remember age has an effect, so the rate you get could differ if you are 55 or 70).
 
With the Sanlam Annuity for example a R1 million investment will give you a guaranteed income of R8504 per month. Hence - a R5.5 million amount equates to +-R46,772.
 
But this income will be level. So it will not increase yearly.
 
Now you might say that inflation will catch up with you. And sure, it will.
 
But if you take an escalating annuity that increases 5% every year, you will get a much lower income initially:
 
On R5.5 million, you will get an initial income of only R29,832 per month. It would take this amount TEN years to surpass the level income you had with a normal fixed life annuity.
 
And, the initial difference between the two options, R16,940 per month, is enough to build up a very nice reserve to protect you from inflation in later years.
 
And remember – this option is the lowest risk possible you could take. You are guaranteed that income, it is not investment linked but a form of ‘insurance’. So you will continue getting it until you die.
 
The T’s and C’s now come in if you have a spouse for instance.
 
You can take out the annuity as a Joint Life Annuity. That means if one spouse passes away the second will continue receiving an income. This amount is slightly reduced at R41,943 per month from a R5.5 million investment.
 
The other important fact to remember is, your children or other family members will not receive anything from the annuity once you pass away.
 
 
What about your income with a living annuity?
 
If you take a Living Annuity instead of a Life annuity, you could effectively decide how much income you want at the end of each month (within 1% and 17.5% of total investment value).
 
Investing R5 million in a money market fund at 8% a year (lowest risk possible - Allan Gray money market fund averages 8% a year since inception, 7.8% in the past year) would mean R33,333 monthly income if you want to preserve your full investment value.
 
But taking that amount means you still won’t get inflation-adjusted returns from the living annuity – you would have to take a smaller amount initially.
 
The money from the living annuity though will pass to your estate in case of your death.
 
So what should you do with your cash when you retire?
 
This isn’t an easy one, as what someone with R10 million retirement capital will do, differs from someone with R5 million retirement capital, and differs from someone with R2 million retirement capital.
 
Firstly, at this stage a guaranteed annuity is more attractive than an escalating annuity if you ask me.
So, what I’d do is get a guaranteed annuity for the absolute minimum amount that I can live off each month.
 
Then you know you will always have that money each month.
 
Then, with the capital left over you can make a number of choices.
 
You could put some of it in a Living Annuity (if you have to have a certain amount in annuities based on your pre-retirement assets). Or you can simply invest it into individual shares or unit trusts. Sygnia actually has a hybrid annuity, which is part guaranteed annuity and part living annuity with discresionary investment and variable income.
 
But you need to realise that this money is at risk, and your guaranteed annuity would have to be enough to keep you afloat if this money is lost or reduced in a market crash for instance.
 
With regards to passing on a legacy – you should always ensure you live life to the fullest. Don’t try to save money to pass along for when you are dead. Your kids can, and should, build their own legacy.
 
Anyway, even with a guaranteed annuity that doesn’t leave anything for your estate there’s still your house and other assets that are left behind.
 



What you need to know to secure the biggest income possible at retirement
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