Providing an Optimal Investment Strategy into Retirement
A legacy means different things to different people. To some of us, it is leaving your children money and assets upon your death. To others it is special holidays and adventures to be shared with children and grandchildren or funding a grandchild’s education. At retirement, you will need to decide how to convert your life savings into an income for life, while providing for the legacy you would like to leave.
But the question is, how best do you do this?
The starting point is to determine what your financial objectives are into retirement. Broadly, there are two key objectives you need to balance : how much income your assets need to provide for you to sustain your lifestyle without becoming a burden on your children and whether you would like to provide a legacy for your descendants. Affordability must also be taken into account in deciding which of these will take preference.
The best investment strategy depends on which of these two objectives are most important for you. If providing an inflation related income for life is the only objective, then the most appropriate strategy will involve using a life annuity from a reputable insurer that pays an income for life together with an appropriate annual increase to your income. If your objective is mainly to provide a legacy for your descendants by leaving your assets to them on your death or you need significant flexibility and access to your accumulated savings, investing a large portion of your accumulated savings into a living annuity and investing the proceeds in the most optimal manner would generally be better.
In practice though, the most appropriate approach is often a combination of these two strategies. How much to invest in a life annuity or a living annuity will depend on how much you have saved, your required income, at what age your assets need to start providing you with an income, whether you have a spouse or not as well as the relative importance of the two main objectives set out above.
Recent advancements in the financial services industry makes it possible to structure a strategy that combines the best of both worlds, essentially providing an income for life whilst also making sure you factor in having financial flexibility in order to take that special holiday or leave that legacy. This is done by making use of the latest hybrid annuities, which blend living and life annuities into a single strategy and structure.
Using this new approach:
- Your basic income needs are provided for by a stream of income that will increase with inflation and be provided for your life, irrespective of how long you live. This ensures that your basic lifestyle needs are taken care of and prevents you becoming a burden on your children.
- You have flexibility and access to the balance of your savings, providing for emergencies and the legacy you want to leave.
- You are able to invest the balance of your savings in more growth-oriented investments that grow in excess of inflation.
It is important to re-evaluate your retirement income strategy annually as your needs and circumstances change.
John Anderson
Head of Strategic Development at Alexander Forbes
John is an actuary and a leader in pension fund and employee benefit product development, research and reform.
