Investment call key to security for widows
'Last survivor' in living annuity may face a battle during the lower end of returns cycle
Gender inequality follows many women into retirement because typically lower earnings translate into lower retirement savings, and women may also save for fewer years, having left paid employment to raise their children.
This is compounded by the fact that women, on average, live longer than men.
The fact that women typically outlive their spouses results in a gender bias for the widows of about 90% of retirement fund members who choose investment-linked living annuities to provide an income in retirement.
Living annuitants choose how to invest their retirement savings and draw an income from these investments. By law you are required to draw an income of between 2.5% and 17.5% of your capital in a living annuity each year.
There is no guarantee, however, that the annuity will provide your required income throughout your and your spouse's retirement as there are many risks.
At a conference for the newly established South African Independent Financial Advisors Association this week, financial advisers heard about the risks that living annuitants face of outliving their capital, making bad investment decisions and risking a poor sequence of returns.
Marc Thomas, head of product research at Bridge Fund Managers, said planning an income in retirement using a living annuity was difficult because you did not know how long you would live, and the risk you faced from the order in which you earned good or bad returns was "unknowable".
Although projections may show that your capital will sustain a particular income, these projections often use average returns. But returns are not delivered in a straight line and poor returns at the start of an investment period, while the investor is drawing an income, can deplete capital sooner than expected.
Many retirees are facing huge uncertainty about their future income as returns from investment markets are currently low.
Guaranteed annuity provider Just SA points out that it is women who typically have to deal with dwindling income from a living annuity in their later retirement years, since wives typically are three to four years younger than their husbands and live three to four years longer.
"It is the last survivor, in most cases the widow, who will suffer the indignity of being unable to fund their basic living costs in their final six to eight years of life," said Just SA CEO Deane Moore.
To illustrate the risk to widows, Moore said, assume a couple invests R1-million in a living annuity at retirement, when the husband is 65 and the wife is 61. In real (after inflation) terms, they withdraw R55000 a year, or R4584 a month, and this increases with inflation each year.
If you assume that they earn a return on their investment of inflation plus three percentage points a year, their investment will sustain this income for 18 years, which is also the life expectancy of a man aged 65.
However, after this period, when the wife is likely to be a widow, the income drawn from the living annuity will reach the maximum allowed by law, that is 17.5% of the capital. At that point, the income will decline each year and after another eight years - the life expectancy of the widow - her annual income will be as low as R15000 - or R1250 a month, Moore said.
However, at age 65, the widow could have used R465000 of the capital in the living annuity to buy a guaranteed annuity providing an income for life of R35000 a year or R2916 a month, he said.
Growing with inflation
A couple with substantially more at retirement, for example, R12-million to invest, may encounter a similar problem.
Assuming they withdraw R660000 a year, or R55000 a month, after 18 years the income drawn will reach the maximum allowed, Moore said.
During the next eight years (the life expectancy of the widow) her income will fall to R150000 a year, or R12500 a month.
However, had the widow instead used the capital to buy a guaranteed annuity with a lifetime income of R55000 a month (R660000 a year), targeted to grow with inflation each year, it would have cost her about R8.7-million at age 65 and less at higher ages, Moore said.