How do I know what income I will get at retirement?

And if it will be enough?
Predicting how much income you will need in retirement is tricky when there are so many variables at play. Picture: Shutterstock

Almost everyone will at some stage begin to worry about whether they have saved enough for their retirement. Very few people are wealthy enough to escape that concern.

It is not, however, an easy question to answer.

To start with, you need to work out how much you are going to need, based on what you are currently spending. Then you are faced with the problem of working out how much of an income you are able to earn from the money you have saved, and whether it’s enough to cover that need.

The difficulty with this is that retirement savings are almost always shown as a lump sum. How do you know what that represents in future income?

According to divisional director for product development at Liberty Mark Lapedus, this is currently one of the biggest issues with retirement savings.

“Back when everyone received a pension from their employers, they would get 70% or 80% of their final salary,” he explains. “Everything was calculated in terms of income. But over time we have lost that focus.”

With the move from defined benefit to defined contribution funds, people are in charge of their own
retirement savings, and they concentrate almost entirely on the capital they are building up. But how do they know what it’s really worth in terms of a monthly income?

“Every person saving for retirement is saving for the same goal, which is to replace the income that they are no longer going to have,” says Lapedus. “Yet most people save for a lump sum and forget about what really matters. They don’t often enough translate that lump sum back into an income to determine if they have enough.”

What makes this even more challenging is that there is no easy set of rules you can use to work out how much income you can get from a certain amount of capital. There are a lot of variables at play.

“Most people will be putting away a certain amount of money every month, assume that is going to grow at a certain rate, and calculate that when they get to retirement they will have a certain lump sum,” says Lapedus. “But how are they deciding what that lump sum will be worth?”

If you intend to use your money to buy a guaranteed annuity, what rates are you using? You can work off what is being offered by insurers today, but annuity rates may be significantly different by the time you reach retirement. Since interest rates fluctuate and because life expectancy will change, you can’t accurately predict what life insurers will offer you.

Even if you decide to use an investment-linked living annuity, you face the problem of not knowing what will happen in the markets. You don’t know what returns will be like or what will be a sustainable draw down percentage in the future. 

Once again, you might benchmark against what is relevant in today’s markets, but the environment may be completely different at the time you retire. And the further you are from retirement, the less certainty you have.

One way to mitigate this is to consider retirement saving options that don’t just accumulate a lump sum, but rather guarantee a future income. These products remove these variables.

“From Liberty’s point of view, this is the need we wanted to address when we launched the Agile retirement annuity with the Exact Income Fund,” says Lapedus. “With a portion of your savings you can secure an income, regardless of what happens to markets or interest rates. This may only be part of your final solution, but at least it will provide you with some measure of certainty.”

To retain some flexibility investors may prefer to use this in conjunction with other options, but at least a product like this removes some of the anxiety of not knowing what your money is actually worth. What you have saved is always shown as an income in today’s terms, giving you some sense of where you really stand, and if you really have enough to retire.

Brought to you by Liberty.


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Comments on this article are closed.

If “how much income can I get” is your question then you either need to find a proper Financial Planner or you need to fire your existing one. Planning for retirement starts a long time before the actual event and there are many things one can do to ensure that you are aware of what this phase of your life will look like. It’s that simple, no “product” will solve this problem; planning will.

So we are talking of compulsory funds at retirement. How do you invest these funds into anything but a “product”?

Who said anything about not being in a product (a unit trust, which is a product, or this liberty product or any other product)?

The product won’t solve the issue, planning will. If you haven’t saved enough due to poor planning, no product will rescue you.

I personally work on R5000 pretax income per R1 mil. So if I want R20 000pm I need R4 mil. Then one has to include inflation, so I must try to have R16 mil 20 years from now, hope I meet or exceed that.

I don’t like these “lumpsum is not important, know what you will earn” articles that sometimes are on MW.

Very expensive in fees, I hear about people whos RAs have grown less than 1% over the past 3 years due to all the “administration and marketing” and other fees, while a DIY index fund RA would have easily done 7 to 8% over that timeframe.

The primary challenges are: 1. Contributions originally intended to fund retirement in the defined benefit environment have somehow evolved in people’s minds to be something that has to fund retirement and to leave money for heirs 2. There is limited access to risk pooling in retirement – the only option is to use a traditional annuity or a combo product like Liberty Agile 3. Interest rates are low and life expectancy has increased (but is still low in aggregate in SA).
What the financial services industry can do: 1. Stop promoting the myth that retirement savings should be good for retirement income and for leaving money to heirs – if someone wants the latter sell them a whole life insurance policy which is a far more effective way of achieving that. 2. Bring out a much broader range of risk pooling retirement products starting with deferred annuities; Liberty agile is a reasonable start – but why can’t we buy as a lump sum at retirement a guaranteed CPI increasing income from age 75 or 80 like one can in the US? That could be offered at a lowish cost if sold in SA (with lower life expectancies) and if configured to pay 0 if you don’t reach 75 or 80. Then one’s living annuity (with the balance of retirement funds invested) can be drawn down on with at least the ‘number of years to live’ variable removed. Through risk pooling everyone can derive more from available retirement savings according to their needs (i.e. the age they live to). This is a better approach for the industry than moaning on and on about the level of savings in SA.

End of comments.



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