Living annuities - living on the fault line

The one thing all retirees and soon-to-be retired people need to know is how to manage their investments to ensure it provides a sustainable income, given these repeated shocks. These shocks are likely to get worse and, in particular, need to be taken into account by people who are in the disinvestment stage of their lives.

Investment- linked living annuities are popular among retirees,who invested R58.5bn in these pension plans the year to June last year.

The more income you require from an investment-linked living annuity the less the death benefit you will receive. As one goes up, the other goes down. What that means is that benefits for heirs are seldom achieved.

If you choose a life annuity you hand over your accumulated capital to a life insurer in return for a guaranteed monthly pension for life. Life annuitants can choose from a level life annuity which pays a predetermined monthly pension for life, or an inflation-linked annuity which increases the pension by inflation annually.

The more income you require from an investment living annuity, the less the death benefit your heirs will receive. As one goes up, the other goes down. There are also other costs that can be huge.

Retirees need to make two critical financial decisions, namely, the withdrawal rate and the asset allocation of their portfolios. We propose a methodology that retirees, and particularly advisors, could use to make these decisions in an optimal way.

Evaluation of Retirement Strategies Javier Estrada IESE Business School – Barcelona