It’s a challenging time to even entertain the idea of retiring. The local inflation rate reached its highest point in the last 13 years in the middle of 2022, which caused basic living costs to skyrocket. This caused the purchasing power of consumers to erode more quickly, which made life particularly difficult for those who relied on a set monthly salary.
Because this instability has persisted for an extended period of time, it is even more essential for South Africans who are considering retirement to ensure that they have a comprehensive understanding of the retirement choices that are offered to them in the retail market. This is done so that they can make the most informed purchasing decisions possible to meet their unique requirements for retirement and to ensure that they can enjoy their golden years without undue anxiety regarding their finances.
There are two primary options available on the retail market that can provide income during retirement. This income can be supplemented by the income earned from any number of investments that are at the investor’s discretion.
Non-guaranteed VS Guaranteed
An investment-linked annuity is more commonly known as a living annuity, and the term “non-guaranteed” annuity refers to an investment-linked annuity. Although the asset continues to be owned by you, the name of this arrangement suggests that neither your investment nor your income is guaranteed. Income can be set at periodic intervals and estimated as an annual amount that is between 2.5% and 17.5% of the investment value. The value of your capital is dependent on the investment growth and variability of the underlying investments. After that, this percentage can be changed once a year in accordance with the aforementioned parameters.
On the contrary, a “guaranteed” annuity, also known as a life pension or a term-certain annuity, ensures that you will receive a consistent income on a monthly basis for a predetermined amount of time or for the rest of your life, whichever comes first. Depending on the terms of the contract, this income might or might not go up by a certain percentage each year. Additionally, you will never have ownership of the capital again.
If you had been married at the time of your death, there is a possibility that your surviving spouse will continue to receive a predetermined portion of the income even after you have passed away. However, the capital is lost if the final living assured life on the policy dies before the policy’s maturity date.
What About a Combination of the Two?
A hybrid annuity, which is a mixture of the two types of annuities discussed above, is a third alternative. Through the combination of the life insurance policy and the living annuity, it is possible to annuitize a portion of the funds contained within the living annuity. This indicates that you have the ability to strike a healthy equilibrium between the various trade-offs by transferring supplemental tranches into the portion of the assured life annuity when the situation calls for it, and to construct an ideal portfolio over the course of time.
Despite the fact that there is no foolproof solution that works for everyone in retirement, it can be difficult to determine which of the products listed above are most appropriate for your specific situation. Because of our years of experience, we have identified six potential trouble spots that need to be evaluated thoroughly before any choices are made in order to ensure a comfortable retirement.
In order to avoid running out of money, you need to make sure that your drawdown rate is under control when you have a living annuity. If you take home an excessively high income, it’s possible that your savings will run out too quickly.
The particular fundamental investment funds from which your routine income is withdrawn from your living pension can have a significant influence on the durability of your equity and should be taken into account very carefully. Your risk profile and investment time horizon should be taken into consideration, as well as the necessity for medium- to long-term expansion, and selective allocation to higher-risk investment funds. Funds that are not properly managed are a risk factor.
Purchasing an annuity at an inopportune time If you purchase a guaranteed annuity at an inopportune time in your life, the income rate that the insurer gives you might not be high enough to meet your needs. Due to the fact that the starting income is determined based on the investor’s life expectancy, the starting income increases in proportion to the age of the investor.
You won’t be able to leave your children any money as an inheritance if you choose to go with a guaranteed annuity. This is because guaranteed annuities only pay out a certain amount of money during the guarantee period.
Taking early retirement will result in a few years’ worths of additional income drawdowns, as well as a loss of opportunities to contribute to and benefit from the growth of your retirement fund’s investments.
Going it alone and deciding against getting professional guidance is almost guaranteed to be an expensive choice. Although it is essential to reduce expenses as much as possible, it may also be beneficial to hire a reliable financial planner. Always hold the net investment growth (after fees) in the back of your mind.
It is possible to lead a retirement path that extends your cash reserves to give you peace of mind through the great times and the difficult moments by doing some careful, considered analysis and planning. At first, attempting to understand your retirement plans may feel like navigating a minefield.