Silver Digest March/April 2021

Page 18

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


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