Make retirement money last longer

2010-11-06 13:02

The current economic climate is making life very difficult for most pensioners, especially those who ­retired over the past five years.

Firstly, the recession hit the ­economy, which reduced fund ­values, and one of the measures ­taken to revitalise the economy is to reduce interest rates. The low ­interest rates environment is shrinking returns of the pensioners’ ­income-generating ­investments.

Income from annuities is dependent on the weekly rates that ­insurance companies quote. Insurance company A could quote a ­consumer at the highest rate this week, and a consumer accepts and signs on the basis of those rates.

The problem is that the retirement fund could take two months to transfer the money, and the rates may have changed so much so that there is a discrepancy of several hundred rands.

The difference could mean either higher or lower income than was quoted.

It should also be borne in mind that rates for males are slightly higher than those of females. ­Women generally live longer, so the ­capital amount is expected to ­provide ­income for much longer.

The income also varies from one annuity type to another and is also affected by the guarantee term.

There are several other options that a retiring person has to discuss with their financial planner, taking into consideration their life circumstances, financial position encompassing their debts and health.

It is of critical importance that the correct option is chosen at this point because annuities lock the ­investor into the ­accepted annuity rate for the long term.

The disadvantage is that when ­interest rates go up, the investor does not benefit. But on the other hand, should the rates dip, the investor sits pretty on the higher rate.

There are linked life annuities that offer more flexibility in terms of ­investment options, and the ­investor can choose the level of ­income, but these do not provide guarantees.

The investor has to be prepared to roll with the fluctuations in the ­markets and be knowledgeable enough to understand what the implications of higher drawdown are.

The other important factor is the investor’s tax margin. The monthly annuity income is taxed at marginal tax rate and depending on your ­average rate of tax retirement, your income could be slashed by tax.

It is important to review the ­various options and what the ­long-term outcomes of your option are.

Remember, your retirement ­money is supposed to last until the very last day of your life.

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