Money …
MONEY
WHAT DOES HISTORY TEACH US ABOUT LIVING ANNUITIES?
classes going back to 1900 –
line with inflation and still have
tested how much retirees could
a successful retirement (capital
safely draw from their savings
lasted for 30 years). A closer
without running out of capital
look at the data revealed that the
for 30 years. We assumed each
maximum safe withdrawal rates
retiree invested R1m in a typical
correlated with the first 10-year
balanced fund (comprising 60%
annual real returns the investor
equities, 30% bonds and 10%
experienced. In other words, lower
cash) and drew an annual income
maximum safe withdrawal rates
that kept up with inflation.
coincided with lower real returns,
BY LOURENS COETZEE, INVESTMENT PROFESSIONAL, MARRIOTT
R
Living annuities are popular
and vice versa. This seems
retirement products used by
obvious, but the difficulty retirees
retirees to meet their income
face is that future returns are very
needs, and the major advantages
hard to predict.
of these products are choice,
The table below summarises
flexibility and retention of
the percentage of retirees who
etirement can be a daunting
ownership. Their shortcoming,
failed (failure rates) using different
prospect. Not only is it a
however, is that they place
drawdown rates for all 88 retirees
time of personal adjustment
the responsibility of guarding
with a 30-year investment horizon.
but it is also a time to make financial
against longevity risk – the risk
decisions that will impact your
of outliving one’s saving – in the
lifestyle for the rest of your life.
hands of the retiree.
Retired investors commonly face
The graph below shows the
the dilemma of either maintaining
maximum initial safe withdrawal
a certain lifestyle or adjusting it
rates retirees were able to draw
in order to preserve their savings.
and not run out of capital over a
Typically, the more income one
30-year period.
draws and spends today, the less is
Initial safe withdrawal rates
A drawdown rate of 6% is
available to create future income.
have fluctuated significantly over
common in the marketplace
When inflation is added to this
time. Some retirees were able to
but our research shows that at
quandary, it becomes important to
start with a withdrawal rate as
that rate, almost half of retirees
also grow that income over time to
high as 13%, grow their income in
would have failed. The concern
retain one’s buying power. Marriott has researched the sustainable levels of income that retirees were able to draw historically, to better understand the difficulties retirees face and why, in retirement, you should spend the income and not the capital.
HISTORIC ANALYSIS OF LIVING ANNUITIES IN SOUTH AFRICA Marriott’s research – using returns for South African asset 18
SILVER DIGEST // AUTUMN 2021
