Ciaran Ryan: For many people, the biggest financial decision they face when they retire is how to use their accumulated retirement savings to provide them with sustainable income at the time of retirement. Now, leisure is a complex event and it can be overwhelming for many people. Making the wrong choice about retirement can mean the difference between living a comfortable life or continuing to work past retirement age.
Faria Adam, Head of Retail Product Solutions at Momentum Investments, is joining us to help clarify some retirement issues.
Hi, Faria. Thanks for joining us. Traditionally, people have a choice between a life anniversary and a living anniversary, each with its own characteristics and rules. So maybe for our listeners who don’t know, explain what these are and the benefits of each. Let’s probably start with its living anniversary.
Adam’s address: Sure. Greetings to all. The main theme with a living annual is flexibility. Clients can choose the investment components according to their investment strategy and they can make it suitable for their income. For regulation, a client must choose an income level between 2.5% and 17.5% of the investment value. However it can be adjusted every year.
Now, one of the main consequences of a living annuity is that the client usually takes all the risk. For example, if markets do not grow as expected and inflation is higher than forecast, there is a risk that the income that a client may earn may begin to decline in real terms. Money also needs to last a lifetime. So, if you do not strike the right balance between life and the cost of living, or you are one of those people who have lived a very long time, you may even run the risk of paying for the necessities of life.
Now, the risks of investing and inflation, and the medical advances that make people live longer, are really beyond our personal control. So clients who choose living anniversaries often feel that the main risk is to die prematurely, in which case they want to make sure they can leave some money for their beneficiaries. This is because the remaining capital on the living annuity is paid to the beneficiaries when a client passes.
But what people often underestimate is the risk of negative inheritance. So if a client survives longer than expected and the money runs out instead of leaving the inheritance [their] Dependent, which is often highlighted as one of the major benefits of living annuity, [they] Actually become dependent [their] Family members and it became a negative legacy.
Ciaran Ryan: All right. Let’s talk about life anniversaries. That’s an interesting one. For surviving annuals, living too long can result in a negative legacy. Does the same apply to life anniversaries?
Adam’s address: Absolutely not. Life annuity provides a guaranteed income for life, so it’s a really good match for a client’s basic expenses. The client does not come into contact with the risk of surviving longer than market volatility or expectations, because the income is paid for life. These risks are actually borne by all insurance companies, and are the purest form of saving a life annual income because there are no risks for the client. It can be personalized to a degree by adding a level of income growth, adding a guaranteed term, or using a joint life option. But on the other hand, it does not have the flexibility that we have talked about with living anniversaries. Some people need this flexibility to spend on a more variable lifestyle. Usually no capital is found in death for any inheritance.
Ciaran Ryan: I guess we should not forget that each person will have a slightly different need and a different purpose. So retirement planning is a very personal thing, and you touch it.
What we do know is that South Africans are poor savers and they often begin to face retirement savings when they move closer to retirement age, often in their 50s. What are the different needs that people should plan for?
Adam’s address: Certainly, as you say, a weak savings culture – as well as the impact of poor investment behavior or return on investment – is certainly a real risk for retirees. At Momentum we think that advisors and clients should really consider how to meet the costs of a client at the time of retirement.
Now, there are different categories of costs. First, you have the basics The cost of living That includes accommodation, medical aid, groceries – all of your regular essentials that you can’t afford. Then there are Cost of living, Which we all like to do, such as paying for holidays, starting a small enterprise, contributing to a life event. But these living expenses must come after your living expenses.
The third requirement is really the need to leave a legacy. This is often very strongly characterized, it is necessary to leave a legacy, but it should actually come after covering the rest of a client. [their] Cost Now the relative importance of these needs is a function of how much a client has saved before retiring. Savings can be either inside the retirement savings product or outside through the accumulation of other assets. But this is exactly what a client needs when it comes to retirement.
Now a life anniversary is usually best suited to meet a client’s life expenses, which [they] Can’t afford not to. Growth assets, usually included in living anniversaries, are a good match for a client’s living expenses and the need to leave an inheritance.
Ciaran Ryan: Okay, let’s wrap it all together. Even if people decide to use some of their retirement savings to buy life anniversaries, and to invest in some living anniversaries, they may end up with two separate retirement-income products – and this makes it harder to manage their income during retirement. Is there a solution?
Adam’s address: Often people choose only one or the other. In most cases, the decision to share the risk is made at the time of retirement, so it becomes a one-time decision that affects the client’s income for the rest of the time. [their] Life
Now those who have divided their retirement savings into livelihoods and life anniversaries usually have to set up two contracts, which can be a daunting process. We don’t see it happening very often.
But Momentum Wealth has recently redesigned our annual solution to the so-called ‘retirement income option’. An advisor can now incorporate a guaranteed income within a living annuity as one of the elements of the investment. [The advisor] This is achieved by investing a portion of the assets in our newly guaranteed annual portfolio.
So you can still personalize the income by choosing to increase the annual income to protect and reduce the actual value of the client’s income. [their] Risk of inflation. And you can partially meet the inheritance requirements by including guarantee terms and joint life options, but it’s a protected part of your living annuity. The rest of the living annual assets can then continue to be invested in various investment elements to increase the value of capital and provide more flexibility of income. The more it grows, the more options a client has to draw income and leave an inheritance.
So effectively what we’re offering is a solution to increase income and protection – balancing the two for each person.
In addition, a client and consultant will not have to make this decision only at the time of retirement.
With Momentum Solutions they can choose when to save some income and how much they want to save at any given time when the client retires.
Ciaran Ryan: Okay, Faria, here’s a final question. Where can people go to get more information about your new solution at Momentum?
Adam’s address: The best place to visit is our website www.momentum.co.za and search for Reimagined Retirement Banners.
Ciaran Ryan: Faria Adam, Head of Retail Product Solutions at Momentum Investments, thank you very much for your time.
Adam’s address: Thank you for my stay.
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