A presentation at the recent annual conference of the Institute of Retirement Funds Africa brought home to me the extent to which people underestimate the amount of money needed to provide a comfortable, financially secure retirement.
Kagisho Mahura, a Certified Financial Planner and director of Gradidge Mahura Investments, in his presentation “Retirement benefits counselling: From compliance to impact”, explained that many people have little idea how much it takes, and when they find out that the reality doesn’t match their dreams, it’s often too late to do anything about it.
With the exception of lottery winners and beneficiaries of large inheritances, the capital you build up in retirement funds is likely to be the biggest sum of money you will ever have in your life. But will it be enough?
According to the recommended drawdown rates for living annuities, published by the Association for Savings and Investment South Africa (Asisa) in 2010, if, with a 4% after-inflation (real), after-costs return you initially draw 5% of your savings for an annual income, and then increase the amount annually by the inflation rate, your capital will sustain you for 33 years before rapidly depleting.
Note that aiming for a 4% real, after-costs investment return does not come without risks, because your portfolio will be exposed to some stock-market volatility.
Under this scenario, for every million rands saved, you can initially draw an annual income of R50 000, or just over R4 000 a month, if you plan a long retirement. And that’s before tax.
Surely drawing a little more won't matter all that much?
It will – more so than you think. According to the Asisa recommendations, if you start by drawing 7.5% (R75 000 per million, or R6 250 per million per month) at the same 4% real return, the number of years that your capital will comfortably sustain you plummets to 13 – a difference of 20 years. Put bluntly, if, at age 65 you initially draw down 7.5%, you’ll be broke before your 80th birthday.
Mahura said the earlier you come to understand the numbers, the better because you have time to change strategies, including increasing your contributions. And that is why retirement benefits counselling, which retirement funds must, by law, provide, is an essential tool – if implemented in the spirit the regulators intended – in improving outcomes for fund members.
Lower drawdowns
It was thus pleasing to see that, according to a recent Asisa report, retirees on living annuities withdrew, on average, 6.6% of their capital as income in 2023, the lowest average drawdown rate recorded in the past five years.
Asisa’s living annuity statistics show that South African retirees had R682.2 billion in savings invested in 535 509 living annuities at the end of 2023.
Jaco van Tonder, deputy chair of Asisa’s marketing and distribution board committee, said that although the decrease in the average drawdown rate was marginal – from 6.7% in 2022 – it was noteworthy because it was achieved in an environment of rising living costs for South Africans.
Van Tonder said it was encouraging that 34.7% of assets (R236.8 billion) held in living annuities at the end of 2023 fell into the 2.5%-5% income band, followed by 24.1% (R164.1 billion) in the 5%-7.5% income band.
The life annuity option
Unlike a living annuity, in which you choose your investments, choose your drawdown rate (between 2.5% and 17.5%), and take the risk of running out of money, a life, or guaranteed annuity gives you an income for life.
Life annuities are far less flexible than living annuities and once you’re in one you’re in it for life. They come with various options, such as an annual escalation to offset inflation; a guarantee period during which, if you die early, your beneficiaries will receive an income for an agreed number of years; and the same or a lower income for your surviving partner until he/she dies.
But it does provide you with financial peace of mind, which is vitally important for older people in preserving their mental health.
Thus I was also pleased to read a news report that more South Africans are turning to life annuities, which currently can provide an initial income of 50% or more higher than recommended drawdowns from living annuities.
Traditionally, only about 20% of retirees have bought life annuities, with the vast majority opting for the more flexible, but risky, living annuity. (There are hybrids, and many people take both or switch from a living to a life annuity later in life, but this was the general trend.)
Jeanette Marais, CEO of the Momentum Group, said Momentum had seen a 25% surge in life annuity sales between 2021 and 2023, and the industry percentage of life annuity sales had increased to about 40%.
She said this may partly have been because of recent government legislation requiring savings in provident funds to be annuitised and the introduction of so-called “default” annuity options by retirement funds.
But there was also greater openness on the part of financial advisers to suggest life annuities for their clients in the uncertain economic environment brought on by the Covid-19 pandemic.
* Hesse is the former editor of Personal Finance.
PERSONAL FINANCE