NASTASSIA ARENDSE: Warren Thompson had a conversation with Henk Appelo, who is a product developer at Liberty about the factors to consider when planning your retirement-wealth growth.
HENK APPELO: We see in the current environment people are opting to invest in something called a living annuity. Now a living annuity has some really awesome advantages, but has some really important risks that you should be aware of. The first advantage is that you are in control of the investment, so you are participating in investment growth. But the second one is there is no protection against living too long or drawing too much money out of your investments. There is no protection against running out of money, so you have to be very careful when you decide how much you want to draw out of your investment, and that you have a strategy that will actually last your whole life. People are living longer, so it’s really important to take that into consideration.
WARREN THOMPSON: The problem is obviously no one knows how long they are going to live. What do you suggest people do, then? Must the type of investment change to accommodate a period of perhaps 30 years post retirement?
HENK APPELO: Absolutely. When you plan your retirement in a product like a living annuity, you must almost plan as if you are going to live forever, because the reality is that as soon as you start eating into your capital the decline in your income is very quick and very severe. So within a few years you’ll be out of money or you’ll be so poor that the money that you draw isn’t enough to nearly sustain you. That’s the one thing.
The second thing is when you are investing remember that you must still invest for growth. You need growth assets, something that can keep up with inflation, which can compensate you for your draw-down as well as inflation every year.
Now, if we look at our client base, we see people are drawing between 6 and 8% on average. If we take out the very large investors, we see that they are drawing closer to 8%. Now, if you are thinking about drawing 8% out of your investment every year, with inflation at 6%, you are coming to between a 12 and 14% return that you need – after taking into account fees and charges – which is very difficult to come by in the current environment.
So it’s important to know that you have flexibility, you have control, but you also have responsibility. So when the product can’t afford to pay you a certain income, you should consider finding ways to try and draw less for your investment to last longer.
WARREN THOMPSON: And being comfortable holding growth assets in your retirement years, is important to doing that.
HENK APPELO: Absolutely. So again, you are not saving for a lump sum, you are not protecting a capital amount, you are protecting an income amount. So you are protecting a monthly income that you need. Investment assets can compensate you for that. It’s a very complicated environment that we are in. If everything is growing, it’s easy. So get financial help. Go to a financial advisor who’ll be able to advise you on the most appropriate investment to be in.
WARREN THOMPSON: You mentioned those draw-down rates are between 6 and 8%, 8% being on the high end. How long does capital last if you draw down 8%? That to me suggests maybe 15 to 20 years max. But if you have good genes and you’ve looked after yourself, you could be going for a lot longer than that.
HENK APPELO: The 8% is actually a very high draw-down – and that’s the average. We are getting people who are drawing higher than that, 10%, even 12%, and that’s not sustainable. Even at 8%, if you’re not getting a 14% or a 13% return in that year, after fees and charges, then in the next year you’ll maybe get the same rand amount but, if you take into account inflation, you’ll be worse off.
On the other hand people are trying to protect their capital, so they are investing again too conservatively and they don’t get the potential of growth in their investment either.
WARREN THOMPSON: You talk about using the right vehicles. How should a life and a living annuity be combined, or should you just use one of those?
HENK APPELO: It’s a very important point. You can actually split your retirement income between the life annuity – now a life annuity, for those who might not be too familiar with it, is something that will pay you income for the rest of your life. Perhaps you can include your spouse, if you have one, and it will pay until both of you have died.
WARREN THOMPSON: Henk, thank you so much for your time.