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Most SA retirees risk running out of money

‘Our approach to saving is all wrong.’

Many South African retirees in living annuity products may be heading for serious financial trouble. Yet many of them don’t realise it.

Speaking at the South African Independent Financial Advisors Association (SAIFAA) workshop, investment professional at Marriott, Lourens Coetzee, pointed out that many people in living annuities have not considered the long-term implications of how much they are drawing from their savings. They are therefore taking unsustainable incomes and eating into their capital, with the inevitable consequence that they risk running out of money.

This situation is also made worse by the likelihood that South African investors are moving into what is likely to be a sustained period of low returns.

“From our perspective, we think we are going to see below average returns for the next decade,” Coetzee said. “This has significant consequences for clients drawing an income. If you are drawing an income every month, you can’t wait for returns to come through.”

Failure rates

Marriott has conducted research going back to 1900, which bears this out. They looked at the outcomes for an investor retiring at the start of every year from that date, and what they found is quite scary.

Using an average balanced fund-type asset allocation of 60% in equities, 30% in bonds and 10% in cash, they worked out what would happen if investors started with draw down rates of between 4% and 7% and increased these by inflation every year. The question they asked was whether the retiree’s money would last 30 years.

If at any point the retiree’s draw down rate rose to above 17.5% of their capital, they considered this a failure, since this is the current maximum allowed by law. Once you reach that level, your capital is in any case only going to last you a few more years before it is entirely depleted.

Using different draw down rates, this is what they found:

Retirement failure rates in a balanced portfolio since 1900
Initital draw down Failure rate
4% 6%
5% 27%
6% 47%
7% 64%

Source: Marriott

“The one thing that our industry is in agreement about is that 4% is the safe maximum,” said Coetzee. “And that in itself is pretty scary, because if you look at the average client, they are drawing 6% or more from their living annuities.”

What is even more scary is that the 4% calculated by Marriott is before fees.

“If you assume a 1.5% total fee, then you have to reduce the draw down by that 1.5%,” Coetzee said. “That all of a sudden makes 2.5% the safe level.”

In other words, for every R1 000 of monthly income you require, you would need capital of R480 000. Or put differently, every R1 million you have saved can safely produce an income of R2 000 if you have a 30-year horizon.

The importance of the first 10 years

This may sound extreme, but Coetzee emphasised that, particularly in the current market environment, it becomes risky drawing at higher levels. This is because it is very likely that the next ten years will deliver below-average returns, and this will have a significant impact on outcomes.

“The historical analysis shows us that the return you get in the first ten years after retirement has a significant correlation to what you can draw form the starting point,” Coetzee explained. “The difficulty we are facing today is that we are heading into one of the most difficult periods we have seen.”

To illustrate the likely impact of a low-return environment, he showed what would have happened to someone who retired in 1969. The following ten years delivered poor returns, which makes it a good comparison.

If someone who retired at that point and drew 5% in year one, then increased that every year for inflation, they would have failed after 21 years. In other words, their money would no longer be able to provide them with inflation-beating income growth from that point, and it’s likely that it would run out completely within just a few more years.

More broadly, looking at all the instances from 1900 where retirees saw below average returns in their first ten years, the probability of failure looks like this:

Retirement failure rates in a balanced portfolio since 1900
Initial draw down Failure rate
4% 10%
5% 49%
6% 82%
7% 98%

Source: Marriott

This shows that even at a 5% initial draw down increasing for inflation every year, there is almost a 50% chance that their retirement funding will not last 30 years. Again, it’s worth emphasising that this 5% if before fees.

Coetzee argued that one of the best ways to mitigate this is to ensure that you never have to touch your capital. Find solutions that pay a reliable and growing income.

“Our approach to saving is all wrong,” he said. “ We need to think about monthly income, not net worth. Looking for a total return, which I can’t predict is not working for me. I rather have to understand what my capital can give me because that income is more certain.”

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COMMENTS   16

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I am repeating myself – but i’ll say it again – annuities are a con – even a Ponzi scheme with the investor the loser in most cases. the insurance companies love them – they get to keep your money! the govt loves them – they take your taxes. just ask yourself why the UK changed their view of annuities and allowed people free access to THEIR money!!!!
read here:

-https://www.theguardian.com/money/2014/mar/27/changes-pensions-mean-to-you

They are only a con if you sit back and let your annuity manager con you. You can manage your own, as I do, earning over 15% pa and drawing down 10% pa.

No, the lesson for the average retiree is to stay clear of annuities. For once, Robertindydney is spot-on. But ianben, I also agree with you in some measure…. stay very far away from so called Investment advisors’. They all love flashing their wealth in fancy cars and palatial homes whilst their clients frequently end up destitute. Now how do you explain that?

Better to remain silent and be thought a fool than to speak out and remove all doubt…

I rarely agree with you Rob. But in this case I do 100%

The retirement industry as a whole is a charlatan business.

Robert. Clearly you are describing a LIFE ANNUITY whereas ianben is describing a LIVING ANNUITY. I suggest that you learn the difference.

Yet another misleading and nonsense Moneyweb article on living annuities. What it is safe to draw down depends entirely on the financial management of the annuity.

I manage my own and I have been achieving a 15%+ pa return for the last 6 years (22 % YTD for 2017). Based on this I have been drawing down about 10% pa. Thus my capital amount continues to grow. No problem. If your financial manager is not earning you a similar return fire him or her (as I did mine) and send me an e mail: benfieldian6@gmail.com.

A few tweaks will ensure you make it.
1. have enough capital outside of RAs to ensure you’re well clear of the 4% rule.
2. low costs + passive – interrogate the hell out of the fees. Also, educate yourself so you know what’s going on and don’t rely on an advisor.
3. diversify – get away from reg.28 and ensure you have offshore investments. also as per number 1, diversify the income streams so you’re not just reliant on equities in SA, but also global property, global bonds, rent etc. there are always issues so you can’t hit the wall just because one didn’t pan out – also, sometimes equities or global bonds are expensive, then you need to buy more of the asset class that gives value.
4. a little active income during retirement – earning a little bit of money during retirement supplements your capital massively. Every R1k per month that you earn is the equivalent of R300k of capital. The 1% extra withdrawal that results in huge failures at 5%, can possibly be easily supplemented with a 4% withdrawal and some active income. You can draw more when/if the markets start to turn again.

“…The retirement industry as a whole is a charlatan business”. I say all working citizens of this country must take put a portion of their income into a sovereign retirement fund let SARS be the collecting agent. I know many would like me to kill me for this. if you leave a job to another you cannot draw or cash your retirement kitty, it for retirement isn’t it? Why do you want to buy a car with those funds. These monies are to be employed in the infrastructure development and upkeep. If we need more roads that’s the funds we use, when we need dams, that’s the funds we use. When a new or upgrade are required in a power station those are the funds we use. Those loans will be paid back from the services we pay monthly for electricity water and vehicle licences for road use.

At retirement you will get 75% of what you earned at your last job. Those of us who never worked will fall into the social grant system which I bet can be more generous than what we have now. SOUTH AFRICAN RETIREMENT FUND CAN BE A MODEL ESPOUSING THE DOCTRINE OF UBUNTU. I am my fellow countymen’s keeper.

People would have a different view of ‘retirement products’ if the providers had to express fees as a % of contributions and retirement income rather than as a % of capital.

So, contribute for 40 years. Tax saving, say 40% at marginal rate. On average, fees of 1.5% charged on total contributions for 20 years, = 30%.

On a living annuity at 4% drawdown (before fees) and 1.5% fees, another 37.5%. Plus, your drawdown will be taxed.

Simplistic, but you get my drift. Factor in investment growth and your tax saving says the same, while the fees and future tax liabilities increase. I have run NPVs and in my case the best strategy is to take the maximum drawdown and reinvest it outside this toxic fee-gouging environment.

Well, luckily these days there are cheaper index fund providers (if you are part of the “you get what you pay for with managed funds” crowd then the cost obviously is of no bother to you, is it?), which have sub 1% or even sub 0.5% fees.

*talking about fund fees (internal unit trust fees), not platform or advisor fees, because one can avoid those if one wants

MAXIMUM DRAW DOWN .. yes YES yes … REINVEST PART IN EQUITIES …… EVERY FIVE YEARS A NEW ANNUITY WITH MAXIMUM FROM EQUITIES AND MAXIMUM DRAW DOWNS. MOST INVESTMENT STILL RESIDE IN LOW COST EXPENSE EQUITY THUS PROVIDING GOOD RETURNS. ONE CAN STILL INVEST IN EQUITIES WHEN ONE IS OVER THE AGE OF 60.

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