Blue Chip Issue 90

FINANCIAL PLANNING | Retirement
BLUE
CHIP
Eliminating the role of luck in
retirement income planning
When it comes to retirement income planning, some
people may rely on a little bit of knowledge and a
lot of luck to get them through. This contribution
of luck is not something that is regularly discussed
as, after all, if the ability of a retirement portfolio to produce a
comfortable lifetime income is simply a matter of luck, clients
might be forgiven for questioning the role of a financial advisor.
The truth is that luck can often play a role – but it could be
either positive or negative. The question is, can it be eliminated?
Defining and quantifying luck
Secular market trends (or waves) can set retirees up for a happy
retirement with enough money to last a lifetime, or an unhappy
retirement where their portfolio is depleted prematurely. Secular
The truth is that luck can often
play a role – but it could be
either positive or negative.
should be designed to last as long as the individual client’s life
expectancy (which is unknown), and a life annuity is based on
average life expectancy. And if clients are lucky enough to live
well beyond the average, they continue to receive an income, no
matter how long they live.
Investing solely in a living annuity is only appropriate in some
circumstances. Clients who have not saved enough may hope they
are lucky enough to grow their capital in the decumulation phase
– enough so to last a lifetime. But relying on luck is not a strategy.
In fact, when it comes to retirement income the strategy should
be to eliminate the reliance on luck altogether.
[1]
According to the Financial Sector Conduct Authority’s Draft Conduct Standard for proposed
maximum sustainable drawdown rates for default living annuities, if a 65-year-old male wants a
sustainable income that covers his essential expenses for life, the maximum he should draw from
his capital is 5.5% a year. The figure for a 65-year-old female is 5%, as women tend to live longer.
waves are long-term market trends that can last as long as 20 years
and can be bull, bear or sideways trends.
Due to the sequence of returns risk, the returns experienced
early in retirement have a disproportionate impact on the overall
outcome. If one is lucky, the timing of retirement is at the beginning
of a secular bull run. But if unlucky, it’s likely a retiree could run out
of money. In South Africa, for example, retiring five years ago, but
drawing down too much income, could result in trouble.
Eliminating luck
Even if a client has saved a substantial sum that should be
more than sufficient to fund a comfortable retirement, if their
withdrawal rate rises above a sustainable level [1] , then luck plays
an increasingly important role. Eliminating luck, then, is strongly
related to keeping a tight rein on withdrawals (also referred to
as drawdowns).
Even asset allocation, a main contributor to the success of an
accumulation portfolio (generally the working years), doesn’t
necessarily help, as it starts to play less of a role in decumulation
portfolios (retirement years).
For pooled portfolios like life annuities, the dynamics are different.
The two main reasons for this are, firstly, a living annuity must
include greater assets to offset the luck factor, whereas with a life
annuity, the luck factor is minimised. Secondly, a living annuity
Bjorn Ladewig, Head of Distribution, Just SA
www.bluechipdigital.co.za
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