I am 61 years and would like to withdraw my funds from a retirement annuity. The current amount is R15 800 000. I have no dependants and would like to receive an income of around R50 000 per month for life until I pass on. I need advice regarding the best place to put away these funds to generate interest that would get me R50 000 per month.
Thank you for your question and congratulations on reaching this milestone. The information available in your question is relatively restricted, so it would always be best to approach a certified financial planning professional to ensure that your individual financial planning needs are addressed.
I have to start by pointing out that retiring at age 61 might sound ideal, and you may have personal or health reasons for making this decision.
There is however a chance that individuals might live up to age 100, therefore retirement planning needs to be done to this age.
This means that the objective is to provide a retirement income from available resources for 30-39 years, which is a daunting task and an awfully long time. Under those circumstances, I would advise clients to draw less than 4% of their retirement capital per annum.
It should also be stated that even starting off below 4% and staying there for as long as possible, longevity risks (retirement capital depletion) still exist, and a guaranteed life annuity has to make up part of the retirement options considered as an appropriate income annuity solution.
You make no mention of a spouse. The age difference between spouses, together with the fact that statistically women live longer than men, could still add to the already great longevity risk of your investment choice.
As your retirement capital has accumulated and is currently in a retirement annuity, you can choose a post-retirement income annuity vehicle (governed/approved under the Long-term Insurance Act 52 of 1998).
Lump-sum withdrawal option
A maximum one-third lump sum withdrawal is available to you on retirement. The below lump-sum taxes will however apply (cumulatively, with all other previous withdrawals stated below). Deciding how much to take as a lump sum could be considered against the accompanying tax implications, but is best demonstrated by a proper retirement projection which calculates the correct discretionary investment amount.
|Taxable lump sum benefits||Rates of tax|
|R1 – 500 000||0% of taxable income|
|R500 001 – 700 000||18% of taxable income above R500 000|
|R700 001 – 1 050 000||R36 000 + 27% of taxable income above R700 000|
|R1 050 001 and above||R130 500 + 36% of taxable income above R1 050 000|
Only the following lump-sum withdrawals must be taken into account for tax purposes:
Retirement lump sums after October 1, 2007, withdrawals after March 1, 2009, and severance benefits after March 1, 2011.
Life annuities are the only financial instrument that fully transfers the retirement market and longevity risk to a long-term insurer. There are various contract options available, for example, “joint life”, “guaranteed payment period” (income for a set period, even if the annuitant dies), “capital preservation” (payback at death), income escalation rate, and so on. These options will determine the annuity income offered from each respective life insurer based on the life insured age.
Most annuity rates are competitive in the market (they insure the same risk), so if one quote is materially better than another, make sure you understand why. The younger the individual, the lower the initial income amount guaranteed as it foresees more annuity income payments compared to someone older. The more contract options chosen (for example, joint life, capital preservation, 10% income escalation), the lower the initial annuity income offered. When the annuitant passes away outside of any guaranteed term, the investment capital used to purchase the life annuity is forfeited.
Third-party living annuity
This retirement instrument is governed under the Long-term Insurance Act 52 of 1998. It is a compulsory annuity which allows you to decide on the investment allocation, income drawdown (2.5-17.5% pa) and the fact that one can nominate beneficiaries to the remaining capital. This can provide immediate liquidity to surviving spouses/heirs/nominated beneficiaries at the death of the annuitant.
Together with the freedom that this retirement vehicle enjoys, comes far-reaching consequences to longevity- and investment risk management. Asset allocation has to be managed in accordance with the short-, medium- and long-term return objectives of the portfolio. Cash and fixed interest instruments are conservative and listed equities as growth/aggressive asset classes respectively. Your investment return will be dependent on your asset allocation and fund selection and is not guaranteed.
The question on how long one’s retirement provision in a living annuity can be expected to last is dependent on the following considerations:
- Withdrawal (draw-down) rate;
- Asset allocation;
- Return on investments;
- Finance charges/costs; and
- The life expectancy of the annuitant.
The table below provides a good foundation to manage asset class selection/portfolio management in living annuities:
The amount you require is R600 000 per annum, which is approx. 3.8% (pre-tax) of your capital per annum. If you require a monthly drawdown that covers living expenses of R50 000, the pre-tax drawdown requirement per current tax tables (ignoring other that primary tax exemption) jumps to R850 000 per annum (or 5.3% per annum). This withdrawal rate implies a high probability that you will run out of money over the next 30 years.
The Asisa-approved living annuity income withdrawal guideline is provided below. The drawdown rate refers to a pre-tax income withdrawal percentage at inception. Investment return per the table below indicates investment returns after all fees (and tax).
|Annual income rate selected at inception||Investment return per annum (before inflation & after all fees)|
Hybrid living annuities
I find hybrid living annuities transparent and predictable. Hybrid living annuities are in essence a combination of a guaranteed life- and living annuity, which provides greater certainty for individuals that have substantial longevity risk (retiring early/great health record). Extra certainty always comes at a price as investment capital is given up to buy a guaranteed annuity component (either initially or after inception), as part of the combined solution. Some new generation insurers use medical underwriting to predict a more accurate life expectancy of the annuitant. By doing so they are able to offer the annuitant a higher annuity income at inception.
Living annuities carry market sequence risk as part of the investment solution. Sequence risk signifies the risk an investor carries of not reaching their financial planning objectives, due to the unpredictable market movements (going down), soon after initial investment/retirement. Exchange-traded funds (ETFs/passives) increase sequence risk as they offer less protection (when compared to actively managed portfolios) during falling markets. I prefer ETFs in pre-retirement solutions.
Retirement planning is not a once-off or ‘one-size-fits-all’ but an individual investment discipline that considers the relevant set of facts, on an ongoing basis. Each of the three post-retirement vehicles mentioned above has amazing benefits, as well as sometimes lesser-known restrictions. It is therefore difficult to formulate a retirement strategy from a “reader’s question” as various factors should be considered. Lastly, never retire without a thorough retirement projection.