A common dilemma faced by retirees in South Africa is balancing the need for a sustainable income with the desire to leave a legacy for their loved ones. For a 65-year-old with a R5-million retirement fund, securing a sustainable retirement income is crucial, but leaving something for their son is also an admirable goal. According to financial experts, there is no single product that offers the highest income, certainty, full access to capital, and a guaranteed inheritance.
One option to consider is a living annuity, which allows the retiree to invest their R5-million and choose an income between 2.5% and 17.5% of the value each year. The recommended drawdown rate for a 65-year-old is 5%, which translates to R19,000 per month. If invested correctly, this could leave a decent inheritance for the son, as the remaining capital in the living annuity can be passed on to him after the retiree's death. However, the trade-off is that neither the income nor the capital is guaranteed.
Another option is a guaranteed life annuity, which provides a pension guaranteed for as long as the retiree lives in exchange for a lump sum. This removes investment and longevity risk, and the retiree can choose a level income or one that increases each year. A guarantee period can also be selected, ranging from five to 20 years, during which the income continues to the nominated beneficiary if the retiree dies. The longer the guarantee period and the greater the annual increase, the lower the starting income will usually be.
A hybrid approach can also be considered, combining a guaranteed life annuity with a living annuity. This involves using part of the R5-million to buy a guaranteed life annuity that covers essential monthly expenses, while the balance remains in a living annuity. By securing part of the income, the retiree can draw less from the living annuity, giving the invested capital a better chance of growing and being available for the son.
A capital-preservation annuity is another option that directly addresses both objectives. This structure combines a guaranteed life annuity with life cover equal to the original amount invested. The retiree receives a guaranteed income for life, and when they die, the life policy pays a predetermined capital amount to the nominated beneficiary. In this example, the objective is to replace the original R5-million invested, providing a known capital amount available for the family when the retiree dies.
When choosing an option, the key is not to select the one that simply offers the highest starting income. Instead, retirees should start with the income they actually need, decide how much certainty they want, and then consider how important leaving an inheritance is to them. At 65, the R5-million needs to provide for potentially another 35 years, so the retiree's own financial security must come first. However, with careful planning, it is possible to have a sustainable retirement income and still leave something meaningful to their son.
Ultimately, balancing retirement income and capital preservation for heirs requires careful consideration of individual financial goals and needs. By exploring the various options available, retirees can make informed decisions about their financial planning. According to Kenny Meiring, a financial expert, careful planning can help achieve a sustainable retirement income while also leaving a legacy for loved ones.
Key points
- The retiree's own financial security must come first when balancing retirement income and capital preservation for heirs.
- There is no single product that offers the highest income, certainty, full access to capital, and a guaranteed inheritance.
- A hybrid approach combining a guaranteed life annuity with a living annuity can provide a balance between income security and capital growth.
