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• Never draw down more than 6% of your savings
Given “normal” asset returns and a moderate asset allocation, a drawdown of less than 6% of capital per year should ensure Joe’s pension lasts at least 20 years. Draw less than 4%, and Joe’s money should out last him – allowing Joe to leave a legacy for his loved ones.
So, on a pension of R3 million, it means Joe can live on between R10,000 and R 15,000 per month.
If he draws more than 6% per year, Joe will run out of money before the 20 years is up.
• Make sure you plan for inflation
Now here’s the big thing… When working out your monthly draw down, remember to adjust for inflation.
Let’s look at Joe again. If he draws 6% per year, he’ll take out R15,000 per month in the first year. If the inflation rate rises 5% in the second year, Joe will need to draw down R15 750/month to keep up with rising costs. If he didn’t adjust for inflation during the planning phase, by the time he’s 75, his income would be less than half!
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• Cut costs
Now, all of the above will help, but what is the one thing Joe SHOULD do today to increase his drawdown while still never running out of money?
The obvious answer is not to live too long. But since no one wants to die just because they ran out of money, there is an easier way to increase your pension returns.
Joe needs to cut his costs. And no, I’m not talking about cancelling DSTV and living on cat food. I’m talking about the cost of Joe’s retirement product.
You see, most retirement products have several layers of costs. These can add up to almost as much as your income. Sadly, most people don’t know the full costs they pay.
Put simply, there are three basic cost levels in every retirement product:
1) the platform fee (or admin fee),
2) the broker or advice fee and
3) the asset management or fund fee.
You should aim for your retirement product’s total cost to be less than 2%. Here are a few tips to accomplish this.
1) Most platforms offer significant discounts as you increase the amounts you invest. So, if you are dividing your retirement policies among different providers like Sanlam, Momentum, Old Mutual etc, you are likely paying more than you need to. You could easily reduce costs by choosing just one provider.
2) Don’t pay high fees for funds that don’t perform well enough to justify it. Too often I see high fees charged by unit trusts that do not perform very differently from a much cheaper ETF.
3) Be wary of upfront fees. When you retire and convert your Retirement Annuity into a Living annuity, your advisor can charge you an upfront fee on the entire amount. This can often amount to tens of thousands of rand. Avoid at all cost.
So, if you’re close to retirement, follow the steps above and contact me at firstname.lastname@example.org
if you need help working out your safe drawdown limit.
Rand Swiss, Wealth Manager