The Financial Wellness Coach: Structure your policies t…
Question: I am 75 and my husband 80. We have an annuity of R 2.5 million, from which we receive a monthly income of R 9,000. We are having a hard time making ends meet and have increased our income from our emergency fund. I am thinking about increasing our living annuity drawdowns, but I am concerned that we will get into the danger zone where we will begin to siphon off capital. What if the stock market crashes like it did last year? What should I do?
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.
Answers: You have a few options:
Increase your drawdown rate
As a 75-year-old you can increase your annuity to 5.5%. This means that you could get a pension of R11,500. As long as you are careful about fund selection and regularly check fund performance and drawdown rate, you shouldn’t run out of money. The extra R2,500 per month could provide the necessary buffer to ensure that you don’t have to use your emergency fund to live on.
Convert into an annuity
You can convert a living pension to a living pension, but you cannot convert a living pension to a living pension.
The income you get from an annuity increases as you get older, so I often advise my newly retired clients to take out an annuity and then convert that into an annuity as they get older.
Married retirees should consider taking out a joint annuity that is 25% lower at the first death. Many cost of living are fixed, so if one partner dies, the cost of living will not be cut in half. A reduction of 25% would be more appropriate.
In your case, if you took out a joint annuity with a 25% reduction in the first death, your R 2.5 million would make you around R 21,000 a month, which increases 5% per year for the rest of your life.
If the first person dies, the pension would decrease by 25%.
This is more than you need, so I would recommend using the extra cash to top up your emergency fund.
Although your 5% pension increase is on the high end of the government’s target of 3% to 6% inflation, the rate of inflation for retirees is often above the official rate.
The largest items in a retiree’s budget are medical expenses and electricity, and these items have risen significantly faster than the official inflation rate.
I recommend retirees have additional savings or retirement pensions to access in the years to come, when the higher cost of living begins to take their toll.
Since you are under 80 years of age, you also have an insured pension at your disposal.
The monthly income here is usually higher than with an annuity, but not quite as high as with a regular annuity. However, if you need to deposit an amount of capital, this is an option to consider.
Many retirees make the mistake of focusing too much on leaving an inheritance with their retirement assets and not paying enough attention to a decent income. Your retirement assets are primarily intended to secure a pension for you, and if anything remains after your death, then as a bonus. Your children can inherit your home and other possessions.
However, there may be cases when an inheritance of a capital is required.
Your children may have financial problems and paying off their bonds may be just the right kind of incentive they need.
This is where this product comes in. You take a single annuity in your name and in the event of death the amount invested is paid back to your spouse or heirs.
If you choose this option, you will receive a monthly pension of R13,000, which is increased by 5% per year. If you die, R 2.5 million will be paid out.
If your husband is still alive, he can use it to raise a pension for himself or inherit your children.
As you can see, you have several options, and each has its advantages and disadvantages.
A financial planner can help you make the right call for your specific circumstances. DM168
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.