[vc_row row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” text_align=”left” background_animation=”none” css_animation=””][vc_column][vc_column_text]By guest contributor, John Anderson, Executive : Investments, Products & Enablement, Alexander Forbes[/vc_column_text][vc_empty_space][vc_column_text]Many people want to leave a financial legacy for their children or grandchildren. When they are deciding how to invest their savings in retirement, this is a priority for them.[/vc_column_text][vc_column_text]For a large number of investors, this is one of the guiding reasons why they choose to place all of their money in an investment-linked living annuity . These are products that pay an income from an underlying portfolio, where the investor retains ownership of the funds. Whatever is left when they pass away, is paid out to their nominated beneficiaries.

While this may be a noble aim, most people heavily underestimate the risk inherent in this strategy. That is that there are no guarantees in a living annuity. If markets perform poorly or if you draw too much, or both, you can deplete those savings entirely.

[/vc_column_text][vc_empty_space][vc_column_text]Investors also over-emphasise the risk of dying in the early years of retirement and under-appreciate the danger of outliving their money. Most people also don’t contemplate the fact that their legacy is not guaranteed to be positive, especially if they live longer than expected and need to rely on their family for support in advanced ages.

Potentially, an inheritance can actually be negative.  In many cases, it is. You actually draw from your family.

Through extensive research on the optimal investment strategies in retirement, with a great deal of focus placed on this risk, I have found that when you get to retirement, you may have lots of different objectives with your money, but they can be distilled into two things.  One is having a sustainable income that keeps pace with inflation, and the other is having funds available for flexibility or to leave an inheritance.

[/vc_column_text][vc_empty_space][blockquote text=”Investors also over-emphasise the risk of dying in the early years of retirement and under-appreciate the danger of outliving their money. Most people also don’t contemplate the fact that their legacy is not guaranteed to be positive, especially if they live longer than expected and need to rely on their family for support in advanced ages.” show_quote_icon=”yes”][vc_empty_space][vc_single_image image=”6105″ img_size=”full” qode_css_animation=””][vc_empty_space][/vc_column][/vc_row][vc_row row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” text_align=”left” background_animation=”none” css_animation=””][vc_column][blockquote text=”Some may place a higher emphasis on a regular income, while others want to ensure that they pass on a legacy to their children or grandchildren. This is the post-retirement problem in a nutshell. How do you manage the balance between these two requirements?” show_quote_icon=”yes”][vc_empty_space][vc_column_text]There is always a trade-off between these two objectives. The higher the income you want and the more sustainable you want it to be, the less you are going to be able to set aside for other things. How much money you have will also determine the extent to which you can afford to meet one or both of these objectives.

In addition, how much different people value each of these objectives will vary. Some may place a higher emphasis on a regular income, while others want to ensure that they pass on a legacy to their children or grandchildren.

This is the post-retirement problem in a nutshell. How do you manage the balance between these two requirements?

It is a far more complicated problem than anything you face while accumulating your retirement savings. In that phase, you are only balancing risk against return to grow your investment to a suitable level at a given point.

In retirement, however, you want the optimal mix of assets to provide for a given level of spending needs, while maximising your liquidity. Fortunately, you don’t just have traditional asset classes though. You also have the option of life annuities that produce a return with a different profile.

Life annuities, or guaranteed annuities, are perhaps the most under-appreciated and under-utilised tools available to South African investors. According to Anderson and Empedocles’ research, they should be a critical part of any post-retirement strategy, as they are the only asset class that continues to pay an income linked to how long you live.  When making use of this asset class in your strategy, you will also have a greater ability to invest the balance of your investments in more growth-oriented assets – improving the chance of achieving a greater long-term return on your total portfolio.

It’s always better to have at least some part of your retirement portfolio in a life annuity, because it improves the sustainability of your income, and improves the legacy. This may seem counter-intuitive. After all, purchasing a guaranteed annuity requires you to use a portion of your capital to secure a life-long income. At face value, you are therefore giving up some liquidity.[/vc_column_text][vc_empty_space][blockquote text=”Over a full lifetime, it is important to look at the expected legacy at every point in time, and ensure that this is managed responsibly over the full period. Often, as people live longer than expected, they end up having to be supported by their families in advanced ages with a negative legacy value if their income has not lasted to that point.” show_quote_icon=”yes”][vc_empty_space][vc_single_image image=”6107″ img_size=”full” qode_css_animation=””][vc_empty_space][vc_column_text]However, because of the risk of outliving your money inherent in any living annuity, a life annuity can reduce, and preferably eliminate the risk of a negative legacy in the later years in retirement.  Over a full lifetime, it is important to look at the expected legacy at every point in time, and ensure that this is managed responsibly over the full period.  Often, as people live longer than expected, they end up having to be supported by their families in advanced ages with a negative legacy value if their income has not lasted to that point.

For many people, this may seem a poor solution, because the income you are able to secure from a guaranteed annuity will almost inevitably be lower to start with than a living annuity, or even a fixed deposit. The risk over time, however, is far greater in the other options. If you don’t secure an income, you have to have a plan for what you will do when you run out of money.

As a minimum, for your basic needs that you really can’t live without, always have a life annuity. That at least protects you.”

Having a guaranteed annuity for these essential expenses means that no matter how long you live, you will at least maintain a minimum standard of living without having to get money from anywhere else. You can then still invest a portion of your savings in a living annuity where you have more flexibility and discretion.

Depending on your requirements, however, the balance between a living annuity and life annuity may vary. The optimal investment strategy within your living annuity can also change depending on your requirements and how much money you have.  It is therefore important to review the mix between these two types of asset classes regularly into retirement.

These are complex calculations that require the assistance of financial planning professionals. Tools developed from the research can also model how best to structure a portfolio that best meets the two objectives : income sustainability and leaving a legacy.

I like the hybrid annuities that are structured as a living annuity, where you can then invest a portion of your assets in a life annuity as an additional asset class based on your objectives.  It is the most flexible and the easiest way to balance these needs within a single solution.[/vc_column_text][blockquote text=”As a minimum, for your basic needs that you really can’t live without, always have a life annuity. That at least protects you.” show_quote_icon=”yes” text_color=”#dd9933″][vc_empty_space][vc_text_separator title=”About the author | John Anderson”][vc_empty_space][vc_column_text]John is the executive for Investments, Products and Enablement at Alexander Forbes. In this role he oversees the management of the Alexander Forbes Group’s solutions in line with the company’s approach of securing a lifetime of financial well-being for clients. He has 20 years’ experience in employee benefits and asset management.

John has consulted to a number of large clients as valuator, employee benefit consultant, investment consultant and portfolio manager. He was the national head of consulting strategy for many years before leading the Research & Product Development area in Alexander Forbes Financial Services.

John is a fellow of both the Actuarial Society of South Africa (FASSA) and the Institute and Faculty of Actuaries (FFA) and a member of several of the Association for Savings and Investment South Africa (ASISA) bodies and committees.[/vc_column_text][/vc_column][/vc_row]