We believe people
We believe people deserve a retirement Just SA offers guaranteed lifetime income solutions providing retirees with financial certainty and protection from outliving their assets. We partner with best-of-breed asset managers and administrators to provide an enhanced value proposition to meet the different needs of South African retirees. Scan the QR code or visit justsa.co.za for more information Just Retirement Life (South Africa) Limited is a licensed life company, regulated by the Prudential Authority of the South African Reserve Bank and the Financial Sector Conduct Authority as an authorised financial services provider (FSP number 46423). Just SA is a wholly owned subsidiary of Just Group Plc, one of the UK’s leading providers of retirement financial solutions.
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 41
