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Retirement planning: How to make your income last longer

by Stacey Santos

Are you planning to retire? It should be seen as imperative to look at your financial situation before you retire – have you saved enough to move into this phase of your life comfortably? If not, you must consider planning accordingly. There are two significant financial risks you are likely to face: You may outlive your capital, or inflation could erode your money’s buying power.

Retirement planning

Think carefully before (and when) making the following four important decisions to ensure that your income from your retirement investments lasts longer.

Decision one: Do I choose a guaranteed or living annuity?

Some investors struggle to decide whether a guaranteed life or living annuity is right for them. Interestingly, a combination of both may also work in some circumstances.

A guaranteed life annuity

A guaranteed life annuity protects you from drawing too much of your capital in the early years. It will pay you a pre-determined income for as long as you live, effectively insuring you against the risk of outliving your income. The income you receive should be determined by your age and the current interest rate. Therefore, the shorter your life expectancy, the higher the income you’re likely to receive.

One of the drawbacks is that a guaranteed life annuity doesn’t typically give you the chance to leave an inheritance; you cannot transfer a guaranteed life annuity to a living annuity. Once you’ve bought your annuity, your terms are set for life, and there is no flexibility.

A living annuity

Living annuities, on the other hand, provide investors with flexibility. They allow you to select your underlying investments and determine your income rate. However, this needs to be within legal limits.

They also give you a chance to take less income now so that your capital can grow for you to use later in life. However, with flexibility comes market and sustainability risk. Should you opt for a living annuity, it’s recommended you make sure there is no disconnect between your expectations, portfolio and the amount of income you draw from the annuity.

Decision two: What is an appropriate drawdown rate?

Should you decide to invest in a living annuity as part of your retirement planning strategy, you need to determine the drawdown rate (level of income on which you can live); this can be between 2.5% and 17.5%.

Numerous financial experts suggest that 4% is an appropriate drawdown rate. However, this is a rule of thumb and depends on your particular financial circumstances. If you are unsure, it’s best to speak to an independent financial adviser (IFA) who can analyse and advise you on a drawdown rate that best suits your needs.

Decision three: Select your asset allocation

Suppose you have invested in a living annuity. In that case, asset allocation is especially important because your decisions can dictate how much your investment may grow, and effectively, the standard of living you can afford.

Decision four: Should you increase your withdrawal rate annually?

It’s crucial to understand the risks of increasing the withdrawal rate of your income annually. Inflation and annual rebalancing need to be taken into account. Speak to your IFA if you require assistance determining whether or not you should increase your withdrawal rate.

Speak with an IFA if you require expert advice and guidance to ensure you enjoy a much-deserved, comfortable retirement.

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