The living annuity conundrum?
The COVID 19 pandemic has highlighted several retirement problems! Historically, on retirement, most retirees have invested their retirement savings into living annuities.
For living annuities to sustain an income over the duration
of the investor’s lifetime two things are important:
- If the income withdrawal is more than the return
on the investment the capital value will decrease. This will ultimately mean
that the client’s income will decrease in the future.
- The living annuity is dependent on the returns
produce within the underlying investments. These returns could be positive or
negative
International research indicates that an investor should
withdraw a monthly income of 4-5% per annum if they wish their income to be
sustainable for the duration of their lives. It is a sad fact that in
South Africa most people have not saved enough for retirement and they are
withdrawing 7-10% per annum.
Investors who have invested their retirement savings into
living annuities are facing an income crisis as the income provided by living
annuities has decreased dramatically. Looking back over the past two or three
years, income funds were achieving returns +/-8% per annum. However, earlier
this year the South African treasury reduced the Repo rate by 3%. As a result,
the average return for income funds has declined to +/- 5% per annum.
The problem gains intensity for those investors who placed their annuities into balanced funds [multi asset high equity funds] Over the past year the average balanced fund in this sector has achieved -2.79% and over five years the average Balance fund return has been 2.47% per annum. [Performance figures supplied by Morningstar as at 31st October 2020.] What is more chilling is that in the last five major world stock market crashes balanced funds have declined by +/- 20%. This could be calamitous for living annuities.
Herein lies the problem! Investors who withdraw between
7-10% or more will see their capital values diminish and the investments are
doomed to fail!
Let us be quite clear about this! One cannot spend more than
what one is earning! If one withdraws 8% and the return is 2%, the capital will
reduce by 6%.
Investors need to decrease their income urgently if they
wish their annuities to succeed. We cannot emphasize this enough! Please
contact us to review your living annuity income withdrawals and to explore alternative
options.
Christmas Office
Closure
Our offices will close on Tuesday 15th December 2020 and re-open on Monday 11th January 2021. We, at Kevin Mills Financial Services, Greg, Leonie and Kevin wish all our clients, family and friends a blessed Christmas and Happy New Year!
Stay safe and well and COVID free!
“Once in the world, a
stable had something in it that was bigger than our whole world.” C.S. Lewis.
