If 60 is around the corner, and you’re starting to think about your retirement, the image of you sipping piña coladas on a beach could easily be replaced with financial stress. Questions about your remaining years and income could start to plague your mind.
We explain how it works when you’re ready to retire from your retirement investment and how to mitigate the risks associated with retiring so that you can set yourself up for success and head into retirement with peace of mind.
Risks to Your Financial Freedom After You Retire
Two of the biggest concerns for anyone planning for retirement, about to retire, or already retired are outliving their money and inflation rates eroding their monthly income over time.
There are a couple of ways to minimise the risks, but first, you have to understand how and when you will get access to your funds.
What Happens to Your Fund Upon Retirement?
When you retire, you can withdraw one-third of your total capital. And then, according to the law, you must buy an annuity with the remaining two-thirds.
You can take a higher proportion as a cash lump sum if a portion of your investment has vested rights. Vested rights were given to members of provident and provident preservation funds on 1 March 2021 when the legislation governing these funds changed. Any investment that has vested rights will be protected. Up to 100% of any portion of an investment that has vested rights can be taken as cash at retirement.
With this cash, you can then decide to invest the lump sum in a way that suits you, of which an annuity is also an option.
Understanding the Difference Between a Guaranteed and Living Annuity
Some investors get confused between a living and guaranteed annuity and think they have to opt for one or the other. However, with the assistance of your financial adviser, you can optimise using both to your advantage.
Guaranteed Annuity in a Nutshell
As the name suggests, you get guaranteed income for the rest of your life, which is calculated by taking into account your age, life expectancy, as well as the current interest rate. Therefore, this acts as insurance to the first concern of outliving your money.
The downside of this option is that usually your beneficiaries will have no claim over your money when you pass away, as the capital will belong to the insurer. That said, there are some ways around this. For example, if you add an initial guarantee period to your annuity. If you die within this outlined period, your family can still get benefits, but you will get a lower starting income when choosing this.
Lastly, ensure that you understand the effect inflation will have on your annuity income before you commit.
Living Annuities In a Nutshell
A living annuity, also known as a linked annuity, is best known for its flexibility compared to guaranteed annuities. A living annuity pays you a regular income in retirement. You get to choose your level of income (within the legislated limits), as well as your underlying investments. Although income from this annuity is not guaranteed, it’s related to the underlying investments’ performance.
However, as with everything, this flexibility comes at a price, which is market and longevity risk, i.e. the risk of outliving your savings. Always ensure that you consult your financial adviser to manage your expectations and understand your living annuity adequately.
Just because you’re retiring does not necessarily mean that your investment is coming to an end. On the contrary, when investing in a living annuity you likely have many more years ahead of you, and you should optimise it for investment returns.
When considering whether you should opt for guaranteed or living annuities, or perhaps using a hybrid of the two, always ensure that you seek professional financial advice to understand all the terms, benefits and risks to ensure a long, happy retirement.