CONSIDER MULTIPLE RETIREMENT PRODUCTS AND A STAGGERED RETIREMENT FOR A MORE SUSTAINABLE RETIREMENT
Given that future income needs and expenses can vary and are unpredictable, a more flexible solution is essential.
Often, retirees find themselves in a predicament where their retirement income is rigid and lacks flexibility. This situation is far from ideal. Given that future income needs and expenses can vary and are unpredictable, a more flexible solution is essential.
How can we structure a retirement portfolio to be more flexible while also enhancing flexibility in estate planning? Multiple products offer such a solution.
In the past, I emphasised the importance of overseeing one’s investment portfolio to structure investments and assets effectively and achieve diverse income streams. This reduces risk, optimises tax, and provides a better outcome regarding the sustainability of retirement income.
If one cannot diversify sufficiently across different assets, a similar outcome can be achieved by diversifying across multiple retirement products.
Let us spend a moment discussing some of the income challenges that one encounters in retirement:
Sustainable income: There are numerous reasons why one might begin to exert pressure on the capital reserves of retirement funds. These reasons could warrant an article of their own and may follow this piece. For now, I will concentrate on strategies to ensure a more sustainable long-term income.
Flexible income: Future income requirements are unpredictable. It is crucial to structure retirement portfolios to ensure they are as flexible and sustainable as possible within specified risk parameters.
Liquidity in the event of emergencies: We understand that once retirement funds have been converted into annuities (living annuities or life annuities), access to capital diminishes. Only income streams from annuities are available. How can this be addressed?
Transfer of wealth: One of the most important decisions individuals must make when transitioning from receiving a salary or discretionary income to retirement income is the need to transfer wealth to beneficiaries. The amount transferred is equally significant, as it will determine the structure of their retirement income funding.
Complications with inheritance in mixed families where second and subsequent marriages are involved: I often comment that money is the destroyer of families, and this rings even truer in mixed families. Deciding which child must inherit what from whom can be complicated, and the likelihood is that someone will be unhappy with the outcome. This situation becomes more complex when multiple parties must inherit from a single living annuity, especially if everyone has different views and “wants” from the proceeds.
When funds remain in pre-retirement status within retirement accounts, the fund trustees will determine who inherits what, often resulting in disputes and dissatisfaction. Unfortunately, little can be done while the Pension Funds Act governs the funds. However, once retirement occurs, the situation changes dramatically …
In general, most advisors and I would recommend simplifying investment structures and keeping matters straightforward. However, a more complex “in retirement” structure may be beneficial depending on your personal financial circumstances.
If your wealth is accumulated so that your compulsory and discretionary funds are split approximately 50/50, and your income requirement is less than 3% of your accumulated funds, it is still best practice to keep things simple. The 50/50 split creates an ideal situation for structuring income and taxes optimally.
However, if your accumulated wealth is heavily weighted towards compulsory funds (retirement funds such as pension funds and retirement annuities (RAs)), then the following strategy may be advantageous.
1. Staggered retirement
When multiple RAs and retirement funds are held, and immediate income is not required, consider staggering retirement over different periods from each RA. Delay retirement from the last product for as long as possible. This allows you to have multiple living annuities, each with a different income stream, income percentage, and anniversary date.
Consequently, you can adjust your income as frequently as you have living annuities. It also simplifies the process of converting a portion of a living annuity to a life annuity if and when you wish to do so (see point 3).
2. Multiple RAs
Refer to point 1 above. There is an advantage to having more than one RA. Some might argue that it incurs higher administration fees, but this is only true if you employ different administrators. If you utilise a single administrator, your fees will be determined by the funds you have invested with that particular administrator, regardless of how many contracts you hold with them. If this is not the case, consider changing your administrator.
3. Multiple living annuities
Having more than one living annuity has many advantages, namely:
If they were funded from different RAs or pension funds, various income streams with different anniversary dates can be selected. This effectively means that, for instance, you can adjust your income every four months if you have three living annuities.
Different income percentages can be chosen for each living annuity, and an annual payment can be arranged for a one-time annual income from one of the living annuities if capital is required for an emergency.
Each living annuity may adopt a distinct investment strategy based on the income level withdrawn and the need to preserve the capital of that specific living annuity.
Every living annuity can have different beneficiaries. This allows flexibility in terms of specific bequests.
If the planner wishes to provide for minors or individuals who struggle to manage their financial affairs, one or more living annuities can nominate a trust or a testamentary trust, with those individuals recognised as the beneficiaries of the trust.
4. Including a life annuity (age-dependent)
Life annuities have their place when it comes to retirement income provision. The older the annuitant becomes, the more a guaranteed life annuity makes sense, as annuity rates are primarily determined by age.
The higher the guaranteed annuity rate, the lower the income percentage required to withdraw from living annuities.
Living annuities can be converted to life annuities at any time; however, life annuities cannot be converted to living annuities. Some administrators, though not all of them, allow for “hybrid annuities” that combine a living and a life annuity.
The strategy may involve choosing a living annuity while the annuitant is still young (for instance, below age 60) and converting one of the living annuities to a life annuity once annuity rates approach double figures for a specific age.
This option is not suitable where it is a requirement for capital from the annuity to pass to beneficiaries, as the annuity ceases with the death of the annuitant without a capital reserve. Incorporating living annuities addresses this complication. Life cover can also be utilised to compensate for the loss of capital where life annuities apply, but traditional “back-to-back” policies, where insurance covers the value of the purchase amount of the life annuity, tend to be expensive.
How will the ideal retirement solution be structured?
There is no perfectly correct answer, but if you aim for the following structure, you will not be far from being correct:
Aim to accumulate assets that are divided equally between voluntary and compulsory investments. This will provide liquidity, flexibility, and optimal tax structuring opportunities.
Retirement funds: Invest retirement funds in various annuities, allocating them between living and life annuities when wealth transfer is a priority. If life annuity rates are unattractive, hold the funds in a living annuity until rates improve. Reduce the living annuity income to counterbalance the higher income provided by the guaranteed life annuity. Over time, the growth in the living annuities will offset the capital lost in the life annuities.
Disclaimer: It is advisable to assess your personal financial position and needs before determining the most suitable retirement solution for you. Feel free to contact us if you would like an analysis to find out what will work best for you.
Stay focused and committed.
