YOUR MONEY: Flexibility is crucial in your golden years

Question:

I am retiring at the end of the year and have accumulated a nice pot of retirement savings. I have fixed monthly expenses such as levies for the retirement village, medical aid and short-term insurance. But with volatile markets I am worried that my savings won’t last. Someone told me to allocate some of my savings to a guaranteed annuity. Is it a good time now? What should I take into consideration?

— Name withheld

Answer: 

Retirement is a major life event and having to make decisions on how to navigate the next 30 years — hopefully — can be overwhelming.

The current environment of high interest rates and high inflation means volatility in the stock market and many investors are choosing safe-haven asset classes.

But this is the nature of markets and economic cycles. There are a few reasons I would not recommend the guaranteed annuity route, but rather a well-diversified living annuity approach, together with a more liquid investment as an emergency fund.

Sure, the concept behind a guaranteed annuity is sound: safety and certainty in terms of an income “guaranteed” for the foreseeable future. And there are circumstances when it’s appropriate to use this vehicle, or to build a hybrid structure.

The reasons I prefer a resilient, all-weather portfolio within a living annuity structure are as follows:

• By following a diversified approach with asset allocation, and making use of cash and bonds in the shorter term (up to four years), you essentially create the same outcome in terms of income security but keep more flexibility for the future. By including active management and growth assets (equities) together with the conservative approach you can create above-inflation returns. Those returns become so much more imperative when you not only need to keep up with inflation but outperform the drawdown on your income. A well-diversified portfolio recorded almost double the return of a guaranteed product in the past year.
• The guaranteed annuity route essentially eliminates flexibility and choice. I believe in an ever-changing world and it seems risky to deny yourself options in the face of uncertainty.
• Your investment will transfer to your loved ones when you die. Guaranteed options have certain terms attached to them.
• Having the flexibility of changing your income should you really need to. A guaranteed annuity will potentially increase with inflation, depending which route you opt for, but that income then remains constant. With a living annuity you have a range of between 2.5% and 17.5% of fund capital at which to set your monthly income (which can be changed annually). Even though a high-income drawdown is not recommended — to ensure the capital lasts as long as possible — at least the option is on the table should the need arise.
• Being able to change your investment strategy if needed. Nothing remains certain or constant. Interest rate cycles change, the stock market fluctuates, currencies move up and down. A portfolio needs to be able to adapt to new circumstances. Do you really want to lock yourself into a guaranteed annuity for 30 years and rule out, for example, the ability to increase your offshore exposure in response to a weakening rand and local uncertainty?

— Elke Brink, wealth adviser at R21 Wealth Management Stellenbosch

We want to hear from you! Send questions to yourmoney@fm.co.za