The Financial Wellness Coach: Joint life annuities can…

Question: I am 73 years old and my wife is 66. We need R30,000 a month, which is increasing by 5% annually. Our only retirement plan is a R5 million living pension that has generated an annual return of 4%. While we are still in the safe drawdown zone, we are consuming part of our capital every month and according to my calculations we will reach the maximum drawdown level of 17.5% in eight years. What can we do?

Kenny Meiring

Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]

First published in Daily Maverick 168 weekly newspaper.

Reply: Well done doing a cash flow forecast and realizing that there is a good chance you will run out of money. Many notice this when it is too late.

You are entering the danger zone as your drawdown percentage is greater than the returns you will get and the cost of running the annuity.

You have several options:

  • Reduce your drawdown;
  • Choose a more aggressive portfolio for your annuity; or
  • Take out an annuity.

Reduce your drawdown

If the pension you are drawing cannot be covered with your capital in the long term, you may have to make uncomfortable changes in your life.

You may need to move to a smaller house, downgrade your medical assistance, or look for a way to cut your budget.

These are not easy things, but when you need to change something, it is often better to see reality while there is room for maneuver than to be forced to make a drastic change later.

Portfolio selection

The challenge for many people in choosing the right investment portfolio for a living annuity is finding one that will give them the right growth over the long term, but also won’t put capital at risk.

You have to put some of your capital at risk if you want good returns, but as a retiree, falling markets can be disastrous.

We have had a couple of years of flat asset growth, which has resulted in many people pulling out more than the portfolio has returned. This means that they are starting to use up some of their capital, which can be dangerous.

There are some clever portfolios designed for living annuities that offer high returns with low risk. This is done through the intelligent use of financial instruments such as hedges and guarantee funds. This can be an easy way out of your current situation. So speak to someone who is familiar with these products.

Annuities

An annuity gives you a higher income for the rest of your life than an annuity. Since your wife does not have a pension, you have to opt for a joint annuity.

Your 5 million ren can finance a monthly pension of R29,000, which is increased by 5% per year for the rest of the life of you and your wife.

Age plays an important role in your initial pension. Since your wife is seven years younger than you, you should consider reducing the pension after the death of your first spouse.

With a reduction of 25% the initial pension is R32,000, with a reduction of 50% the initial pension is R35,000.

As you can see, you have several options because you identified the problem early on. I often run into problems when there is limited room for maneuver because it was recognized too late.

Insider tip

When you have a living pension, you need to take your income reviews seriously.

  • Take a look at the investment returns on your portfolio and project them into the future.
  • Subtract the annual cost of the investment.
  • Look at your retirement income and see what percentage of the capital it will be each year for the next 10 years.

If it is more than 7%, then you need to be careful and seek the opinion of a professional.

This story first appeared in our weekly newspaper, Daily Maverick 168, which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest specialist dealer, please click on here.

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