What do you need to retire?

2012-11-03 09:45

The majority of South Africans will retire with insufficient capital to purchase the income they would like in retirement.

Although the temptation may be to select a higher income initially rather than adjusting your lifestyle, this
will have a dramatic impact on your income in later life.

Guaranteed annuity

If you opt for a guaranteed annuity you should always select the inflation-linked option so that your income increases with inflation.

A level annuity income will provide you with a higher income initially, but this income remains static and does not increase with inflation.

In the example to the left, the retiree would receive either a level annuity of R8 927 a month or an inflation-linked annuity of R5 060 a month.

Although the temptation may be to opt for the higher income, depending on the rate of inflation the income from the inflation-linked annuity will exceed that of the level annuity within eight to 12 years.

By the time the retiree is 75 years of age, the level annuity income will be able to purchase less goods than
the inflation-linked annuity.

Living annuity
According to the Association of Savings and Investments South Africa (Asisa), the ideal income from a living annuity is 5% of the capital per year.

The table on the left, provided by Asisa, demonstrates the following:
» If a retiree drew a 5% income with an annual investment return of 10% (after costs), they would be able to maintain their income levels for 33 years.

At this point, the maximum drawdown of 17.5% of the capital would not be sufficient to meet the needs for their income.

For someone retiring at the age of 60, that would provide sufficient income until they reach the age of 93.
» If the retiree drew an income of 7.5%, the income would only be maintained until he reaches the age of 73, the only hope would be for better investment performance.

If the capital was invested more aggressively in growth assets and the after-cost return increased to 12.5%, the retiree would be in a position to receive sufficient income until he gets to the age of 82.

» If the retiree drew 10% income, even with an investment performance of 12.5%, their income received would fall before they reach their 70th birthday.

Can I afford to retire?
Ideally you want to know that you could purchase an inflation-adjusted income for the rest of your life.

You could do this either through a guaranteed annuity or a living annuity.

Take a look at your current expenses and estimate how much of those you will still have in retirement.

Hopefully your children would have been educated and your mortgage paid off.

To be realistic you would need to add about 50% to your current medical expenses as medical costs rise above inflation and you have more medical costs when you are older.

Based on current annuity tables, for every R1 million a 65-year-old man will receive an inflation-linked income of R5 000 on a monthly basis to be in a position to sustain himself.

So if you need R15 000 in retirement you need to have ­­R3 million.

How much income you can afford at retirement

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