Managing your living annuity.

Managing your income

• While there are no guarantees in investing, research shows that if you draw an income of no more than 4% you have a high probability of your income lasting throughout your retirement.
• You must consider inflation. To be able to increase your income in line with inflation and preserve your capital in real terms, you need to get enough growth to grow your capital by the same amount as inflation plus the amount you draw as income. So, if inflation is 5% and you take 4% income, you need 9% growth to sustain your income. For example:
  • You have R100 000 capital and your yearly income at 4% is R4000.
    • In a years’ time, you want your income to increase by 5% to R4200 cover inflation. So, you need to get 4% growth to cover your income plus 5% growth to offset inflation.
    • After a year you’ll have R105 000 and your income at 4% will be R4200.
• You do not need to preserve your original capital balance throughout retirement to keep getting the income you need. If your capital can last long enough to keep your income going for your lifetime, it’s fine for your capital to start reducing.
• If your income exceeds your growth, the investment balance reduces. This means that every year, even to get the same income, you must increase the percentage of your income in relation to the investment balance. Once it reaches 17,5% the income cannot be increased. The investment balance will reduce every year because you won’t likely get investment growth of more than 17.5%. At the anniversary, the income for the following year will stay at 17.5% but calculated on a lower investment balance so your income reduces annually.
• A useful feature is that you can transfer part or whole of your living annuity balance to a Life annuity at any time up until age 75. This allows you to lock in a higher guaranteed income for life. This is because Life Annuities offer more income for a given investment amount when you are older and because you can time the transfer to a life annuity so that you do it when annuity rates are at a high. It may be good planning to start with a living annuity for maximum flexibility in your early retirement years and make a part or full transfer to a life annuity later for a guaranteed lifelong income in the latter years.