LOOKING AFTER YOUR LIVING ANNUITY

Approaching your retirement date comes with anticipating the life you plan to live beyond employment. However, this process also forces many investors to make some of the most critical financial decisions of their lifetime. Having saved towards a retirement nest egg over multiple decades, for many it will be the single largest pot of capital with which they would need to make a decision – and one that will ultimately determine their lifestyle for the rest of their life.

Many investors choose to transfer their retirement savings to a living annuity (as opposed to a guaranteed annuity) as it comes with various pros – not least that you can decide on how much you’d like to draw as your income from year to year (within the legally defined limits of 2.5% and 17.5% per year, of course). You can also leave any unused assets to your chosen beneficiaries.

However, choosing the living annuity as your retirement income vehicle comes with the most challenging of investor needs: simultaneously investing for both immediate retirement income and long-term growth. The key challenge is to ensure a sustainable standard of living by balancing the needs of today with those of the future. This is best achieved by investing in an appropriately constructed portfolio and selecting a conservative income drawdown rate early in retirement. Drawing too high an income at the start of your retirement and/or expecting too high a rate of return is as dangerous as investing too conservatively or too aggressively.

Just how sustainable it is to draw a certain level of retirement income depends on how well you manage the fine balance between the return earned on the capital you have invested in the living annuity, and how fast you withdraw your income.

So, what would a prudent plan look like?

The rule of thumb is that a low initial drawdown rate of 5% or less will allow the underlying investment portfolio to grow and sustain its ability to protect the purchasing power of your retirement income over time. It’s worth noting that the less you draw early on in retirement, the more you enable your capital to grow, and the better it will be able to sustain you further down the line. To grow your income so that you keep up with inflation over the course of 25 to 30 years, your capital needs to grow, too.

Given that you still have a multi-decade time horizon over which you need inflation-beating returns, you require a diversified portfolio that has meaningful exposure to growth assets such as equities and property. Investors early in retirement should seek funds that allow at least half of the portfolio to invest in growth assets. At Coronation, their flagship living annuity portfolio, the Coronation Capital Plus Fund, will have approximately 60% exposure to growth assets on average.

But this is just half of the equation. Your living annuity’s underlying investment fund also needs a strong focus on risk and potential negative returns over shorter time periods – this is important given that you will be drawing a regular income from the fund. The Coronation Capital Plus Fund is therefore managed to not deliver a negative return over any rolling 18-month period.

Once your living annuity plan is in action, you should carefully moderate the amount of retirement income you draw in response to the performance of your underlying investment. By applying a few spending rules, such as dynamically adjusting your income drawdown in response to returns, retirees can ensure capital preservation. In other words, first earn the returns before spending them.

is in action, you should carefullymoderate the amount ofretirement income you draw inresponse to the performance ofyour underlying investment. Byapplying a few spending rules,such as dynamically adjustingyour income drawdown in response to returns, retirees can ensure capital preservation. In other words, first earn the returns before spending them.If you are close to retirement and find the complex decisions that you are faced with to be overwhelming, it’s worth keeping the basics in mind when you choose a living annuity as your retirement vehicle. The key is essentially to: 1) start with a sustainable initial retirement income drawdown rate, 2) structure a portfolio that is appropriate to your needs, and 3) review and moderate your retirement income on a regular basis. •