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[TOP STORY] Retirees struggling to live off investment income

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SIMON BROWN: Now we have Roland Gräbe, head of DFM at Old Mutual Wealth on the line. Roland, I appreciate the early morning time. Living annuities – once you sort of hit retirement, you cash out your Regulation 28 product. You can take some of it out in cash. The rest goes into a life or living annuity. The living annuity regulation says you’ve got to draw between 2.5% and 17.5% per year. That’s fine in a rising market, but in a falling market frankly it becomes quite tough and potentially a risk to the retiree.

ROLAND GRÄBE: Good morning, Simon. Yes. Certainly in the market conditions we are feeling at the moment. For people withdrawing money and trying to live off the income, falling markets represent a massive challenge and also quite an emotional onslaught.

SIMON BROWN: Is there an elegant solution? The one that obviously springs to mind is, well, you could go and find assets that would give you a return. For example, if you want to take out 5% and inflation is 6%, you need your portfolio up 11%. But chasing risk is seldom a good idea. Are bonds perhaps an elegant solution to managing the process?

ROLAND GRÄBE: Simon, you’re absolutely right. In order to achieve around an 11% annual return or inflation-plus-five with a traditional portfolio you have to take significant drastic [action]. It almost implies that the majority of your investments will be in the equity market, which will make you very exposed to the volatility in the market. What I will say is that very few people can even survive drawing just a 5% income. That tends to be almost the lower-end ideal situation.

A lot of people withdraw 5%, 8%, 10%, 12% per annum, and then making the money last really forces you into a very risky investment proposition, which then exposes you to down-markets like we’re seeing now.

SIMON BROWN: I take your point. Of course bonds are great, but they’re not necessarily going to give you that level of return. What we’ve seen so far this year is almost everything down. A lot of people I speak to look at the idea of sort of a blend of a life [annuity] and living annuity. That’s got some pros to it [and] of course cons, particularly in terms of passing on to your heirs. But that life gives you some certainty, but it of course comes probably at a lower return because the risk has essentially moved on to the administrator.

ROLAND GRÄBE: Yes. Very simply put, a life annuity is an insurance product, and you basically buy a contract to receive a pension for life. Those are very expensive, because the insurance company takes that responsibility away from you and, if you want to buy a life annuity with inflation increases, you’ll probably receive a lot smaller monthly income than you might expect.

So living annuities are used more for people who have significant savings and want to manage that and probably leave something behind the day they die.

[They are] quite popular, I guess, with most people who retire [from] formal employment. So in South Africa the majority of people retiring do take up a living annuity, which means they take the investment risk throughout their retirement period.

SIMON BROWN: Do we see in a living annuity – to your point of a moment ago, particularly if you’re drawing down a large amount – [that] you need to be heavily weighted towards equity? Are there restrictions? I’m thinking of Reg 28 restrictions in terms of offshore, restrictions in terms of property and cash and bonds. Do we see similar sort of restrictions within the living annuity?

ROLAND GRÄBE: Simon, no. You’ve got a lot of investment freedom. You can have 100% of your money offshore. You can have 100% of your money in domestic or local equity. You can put it in cash, you can put it in a bond portfolio. So no. Living annuities have significant investment freedom, simply because the risk of the investment is yours.

SIMON BROWN: Okay. I take your point on that. The risk is absolutely yours. This then [comes] back to perhaps the first point where it’s so incredibly important to engage with the manager of your living annuity around your needs, your requirements and your overall risk profile.

ROLAND GRÄBE: Absolutely. And that’s why we in balanced-fund portfolios work with financial advisors [because] making these decisions can become really tricky, because the market and the emotions in the market often force clients to disinvest or reduce risk at the worst possible time.

You know, we see people self-advised now fleeing the market after it has fallen a considerable amount, and this leads to people missing out on returns when the market recovers.

Because, as we saw in March/April 2020, that can happen incredibly quickly with staggering returns on the JSE out of nowhere. So remaining invested and also having a well-constructed retirement plan is crucial.

SIMON BROWN: I get that point. We don’t know when the market will recover. We know it will recover, and oftentimes it will recover with alarming speed, and you are left staring in disbelief at the recovery.

Roland Gräbe, head of DFM at Old Mutual Wealth, I appreciate the early morning.

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