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robust-retirement

The importance of a robust retirement plan

Now is a good time for retirees to secure a guaranteed income for life. According to retirement income specialist Just, if your retirement savings were invested in balanced funds through the market turmoil of 2020, it is currently possible to secure a guaranteed income for life that is more than 15% higher than it would have been had you invested on 1 January last year.

“This demonstrates the value of establishing a robust retirement plan and sticking to it, especially through market turmoil,” says Deane Moore, CEO of Just. “By contrast, if you were one of the many investors who became unsettled and switched to more conservative options, you would have watched your portfolio lose about 15% during March/April last year.  Furthermore, you would have locked in your losses and missed out on the subsequent market recovery.”

Moore points out that it is estimated that South Africans lost R100 million of their savings overall between April and December of 2020 by switching funds. “After many investors moved their savings into cash, SA equities delivered a huge 54% return in the 12 months to March 2021, which many missed out on.”

If you switched to more conservative investments inside of a standard living annuity, you would have negatively impacted your retirement income, which would already have been affected by the five years of relatively poor market returns that preceded 2020.

“This exposes the risks associated with standard living annuities where, because you can change investment decisions, you carry your own investment risk and your own longevity risk, which is the risk of your money running out of road before you do.”

Unfortunately, according to Just’s 2020 Retirement Insights survey, many retirees fell into this camp.  Only 40% of respondents said they were content that they had enough retirement savings to last for their whole retirement. The survey showed that many retirees realised that they can’t afford the effects of market volatility, and some shifted some of their capital to lock in what they could.

For your clients facing retirement, Moore offers some tips to share:

1. Think about retirement savings in two pots

  • A pot to ensure you have enough income to cover your essential expenses for life.
  • A second pot for discretionary spending or to leave a legacy.

2. Choose appropriate investments for each pot  

  • An appropriate investment for the first pot is a life annuity, which you can access as a standalone product or as an investment choice within certain living annuities.
  • Once the first pot is secured, you can consider options that provide flexibility, growth, and a legacy for beneficiaries.

3. Choose the right life annuity

  • New-generation with-profit annuities are designed to withstand market conditions to guarantee your income for life, while providing annual increases linked to the performance of a balanced fund.
  • You can use your retirement savings or discretionary savings to invest in these annuities.
  • As mentioned above, you can also access a life annuity in certain living annuities through some of South Africa’s leading living annuity providers.

Because long-term interest rates are high, it’s a good time to lock-in a retirement income for life, particularly if your savings benefited from recovering markets because you stuck to a sound investment plan,” Moore concludes.

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