At the recent Keynote 2021, Sherwin Govender, business development manager at Glacier recently outlined some of the challenges retirees face when planning their retirement income and how a blended solution can change the outcomes positively.
A bleak picture
Only 6% of South Africans can retire in comfort and enjoy a similar lifestyle to the one they had before retirement. Further investigation reveals that:
- The number one fear of all retirees is that they will outlive their money;
- 67% of retirees have adult dependants;
- 51% of retirees cannot afford to make ends meet;
- One third of retirees cannot afford medical care;
- 67% have no, or insufficient, retirement provision; however
- 69% expect to retire with the same standard of living.
These statistics show that the majority of those that are retiring and close to retirement are likely to have insufficient retirement savings and much higher income needs. It also highlights the fact that client expectations are very different from their actual planning.
The risks in retirement
Sherwin further pointed to the risks that warrant serious consideration when designing a post-retirement income solution:
- Sequence risk: the risk of retiring at a time when the markets are performing badly. Sherwin uses the analogy of a person retiring on 1 April 2020, in the middle of the COVID market crash. That person would need substantially higher market returns to recover losses suffered because they will be taking an income.
- Long life (longevity) risk: the risk of living longer than expected and therefore running out of money during your lifetime.
- Dependant risk: the risk of your dependants not having resources upon your death.
- Liquidity risk: the risk of not having enough available capital to meet monthly expenses.
- Investment risk: the risk of poor returns after retirement that reduce your ability to withdraw income to meet your needs.
- Inflation risk: the risk of a decline in purchasing power and not being able to meet monthly expenses.
The current environment in the market shows that sequence risk, longevity risk, dependant risk, investment risk and operational risk are much more prevalent then in the past.
The traditional planning solution is to use 100% of retirement capital in a Living Annuity (ILLA). ILLAs have historically allowed clients income flexibility, comprehensive investment options and the chance to leave a .
However, these benefits are reliant on strong investment returns which have not been the case in the last five years. Using a traditional guaranteed life annuity can reduce sequence risk, market risk and longevity risk but the structure doesn’t always fare efficiently in good investment market conditions.
You have two planning solutions that vary in effectiveness during different conditions. The logical step is to diversify across the solutions for a more optimal plan.
