From annuities to inflation risks: Retirement planning jargon explained

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When investing in a living annuity, it's essential that the capital lasts at least as long as the remaining lifespan.
When investing in a living annuity, it's essential that the capital lasts at least as long as the remaining lifespan.
  • When planning your retirement, it helps to understand what you're investing in and why.
  • But investment jargon can be difficult to understand for ordinary people.  
  • Fin24 spoke to three experts to decode frequently used terms. 

Retirement planning starts with understanding the choices open to you – but this also means understanding sometimes-confusing jargon.

Fin24 spoke to three experts - Paul Wilson, chief investment officer of Glacier Invest, and Glacier business development managers Rocco Carr and Linda Blom – to decode some of the more frequently used terms.

Sequence risk

This is the risk of timing your retirement badly. Your retirement capital is most vulnerable to the impact of market drops just before or just after retirement. At these stages market volatility poses a serious risk to your investment.

If the market takes a downturn before your retirement, and there isn't enough time for your investment to recover before you reinvest your retirement savings into a post-retirement solution, you lock in the capital loss as a result of that market drop.  

In the long term, this reduces the sustainability of the investment, as there is less capital left to grow and from which to draw for the remainder of your retirement income.

Longevity risk

When investing in a living annuity, it's essential that the capital lasts at least as long as the remaining lifespan. How long that time frame would need to be, is the million-dollar question, and this is what is known as longevity risk. 

Investment risk

You're never guaranteed a positive return on the investments in your underlying portfolio because of market exposure, which means there's an element of risk to your capital and your income. This is known as investment risk.

Inflation risk 

When your level of income can't keep up with inflation, your income loses purchasing power.

Life annuity

The advantage of a product like this is the guarantee of having an income for life. You can select between a single or joint life annuity. 

Unlike with a living annuity, your capital in a life annuity cannot be left to beneficiaries when you pass away, and you can't adjust your income.

However, when starting your life annuity, you can opt to have the income increased every year by a certain percentage, or at the inflation rate.

In some instances, you may add a life cover policy to provide a specified amount to your loved ones when you pass away, thereby providing for future generations. If you opt for a single life annuity, you have the choice to take it with or without a specific payment term.

Joint life annuity

A joint life annuity provides an income to the first life insured, and to the second life insured after the death of the first life insured.

A risk of the joint life annuity is that, if both spouses should pass away in year one without a guaranteed payment term, there's nothing left for the children or other selected beneficiaries to inherit.

It is, however, possible to select a payment term between five and 20 years, and should both lives pass away during the term, your elected beneficiaries could be eligible until the term is over.

Living annuity

A living annuity is a product that's invested in market-linked underlying investments – allowing you to benefit from the returns of an investment portfolio with market exposure.  

If you have an existing living annuity, you can convert it in full to a life annuity at any stage later. The older you are, therefore, the later you buy a life annuity, the more attractive the rate becomes, which can play in your favour.

Income stream management

Together with your financial advisor, you can structure your retirement income plan according to your needs for optimal income stream management to prolong your retirement income strategy as much as possible.

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