| In my last blog I talked about pre-retirement, and how to use those crucial accumulation years to fatten the pot and give you the retirement you expect. Once you have reached that ‘event’ and now that pot of money has to be converted from accumulating for retirement, to producing you an income you have reached a cross-roads – and if you and your advisor haven’t long since made a plan for this day, then please proceed with caution. Decisions made with your retirement funds often cannot be reversed. If you don’t have an embedded retirement plan, you’ll probably hear things from your planner that you don’t like. She may be recommending that your income you take from your funds is way below your expectations, let alone the replacement income you’re used to. You may be tempted to ignore her advice and shop around until you find someone who meets your expectations. I have spoken about this before in other posts, but it bears repeating, if you want your income at retirement to be certain, increase with inflation annually and last all of your life – there is going to a PRUDENT drawdown on that capital above which those basic income needs go out of the window.  Here are some things that you need to know before going into any discussion with an advisor who will help you ‘transform’ your investment from growth to income producing: Number One: The first thing you need to do is get a very good handle on your expenses, and if necessary, start cutting out the things that are no longer necessary. What medical aid are you on – and will you be able to afford it going forward? It really shouldn’t be more than 10% of your monthly expenses. What aspects of your life cover do you still ‘need’. (What you want is a completely different conversation with your advisor and will depend on how much fat there is left in your pension after all the necessities). Disability cover falls away at age 65, but do you need life cover? Perhaps – if you still have liabilities or your dependents would not be able to live on your ‘pension’. Dread disease cover is expensive, and if you have medical aid and gap cover is another ‘nice to have’. How you decide to spend your pension is completely personal, and everyone’s priorities are different – just keep the spending within your ‘pension’. One of the most problematic areas is car replacement in retirement – that is probably going to have to be a lumpsum amount. One popular solution is to have a ‘newish’ (new-second hand is the more cost-effective choice) car that will last at least 10 years. Thereafter Uber is probably a way better solution.  Number 2: If you have a formal retirement fund – Pension, RA, Provident fund etc you can take 1/3 as a lumpsum, the first R550k of which is tax free – a lifetime amount, the rest is taxed progressively from 18% – 36%. You do not HAVE to take this lumpsum, in fact it might be prudent to just take the first R550k if it’s still tax-free and convert the rest to a compulsory annuity. That R550k can be used to pay off any remaining debt or be a slush fund for unforeseen expenses that your income can’t accommodate. If you have bits and bobs of investments in pension funds that you’ve accumulated over the years, it might be prudent to consolidate them first (this often creates a ‘critical mass’ that is cheaper to invest and opens more investment opportunities). Number 3: The other 2/3 has to be taken as a compulsory annuity. There are 3 types of compulsory annuity – a living annuity (that survives after your death, leaving your beneficiaries with the investment), a life annuity (in its various forms including a joint annuity with your spouse, increasing at inflation etc.) where you lose the capital remaining on your death (or your spouse perhaps) and then a hybrid of the two (which is quite complicated, and if recommended to you, make sure you fully understand before signing onto).  Number 4: In a living annuity (my preference unless you haven’t guessed) the annual drawdown (aka income) you can get from the annuity is between 2.5% and 17.5% per annum. Warning – this is where the devil is in the details and a broker can fool you into thinking that he is getting you a “better deal”. This annuity is going to have to put food on your table and a roof over your head for decades into the future and I cannot emphasise enough how important that you choose a ‘prudent’ and sustainable annual income drawdown percent. Ask your advisor this simple question – will this income be constant (not fluctuate down at any time for example), grow with at least inflation every year and never run out, no matter how long we live? In order to achieve that the ‘income drawdown’ in a living annuity it should not exceed 4.5% – 5% of the capital per annum (in today’s interest rate and inflation environment – of this changes substantially then those assumptions will have to change too – but in a living annuity you can at least do that). Anything over this and you risk the capital having to be depleted and eventually running out. The problem I have with ‘life annuities’ is that the amount you are paid is pegged on the day you get it, and no matter what happens to interest rates thereafter, you’re stuck. In life annuities, as soon as you start factoring in inflation increases, the percentage you’re paid drops so much you might as well have a living annuity – and have some wriggle room for when things change. (And it is WHEN, not IF – markets and economies change all the time, sometimes drastically – if you give away your flexibility for the illusion of ‘certainty’ you may severely impact your future financial security – at a time that you can’t do anything about it – you can’t exactly go out and get a job).  Number 5: The income that you receive from any of the above annuities is taxed as income in your tax return. (Even if you’ve been comfortable with auto-assessment from SARS up to now – do yourself a favour – find a tax practitioner, there are significant changes as you go over 65 years and there are more claims that you can make, especially as relates to medical expenses. If you have other taxable income still coming in – then your annuity income will be taxed at the ‘marginal’ rate. In my next post I will be going into this in more detail (I do have a free newsletter that will give you the heads up on not just the economy, but new posts and podcasts – contact me if you want to go on it). Your retirement fund should include a tax scenario (for both you and your spouse, if you have one) and include recommendations on how to optimise that tax (especially if your married, and perhaps have different marginal tax rates – (section 56(1)) of the income tax act). One of my future posts is going to go into this in a lot more detail. Number 6: If you have ever been retrenched, ‘retired from’ or cashed in a formal retirement fund you may not have the full R550k tax free amount you are expecting. Get your advisor to check with SARS.  Number 7: Please insist on a full financial, retirement and estate plan that you and your advisor can use as a benchmark going forward. Number 8: If you haven’t done it yet, now is the time to make sure your financial affairs are organized and easily accessible to your family or whoever is going to be tasked with helping you should you become incapacitated or (as is inevitable unfortunately) – die. A digital filing system, while useful to you, is going to be useless to anyone else. I have an old-school physical filing system I give to all my clients (free to anyone on request) I call the RedFile. This puts all the important information that someone might need to get claims in, wind up an estate, find the Will and living will and a lot more besides. This should also have copies of your financial plan, so that if you wake up in the middle of the night or over a weekend, you can check on the plan and not have to blow up your poor advisor’s phone for reassurance. Articles and Blogs: Wealth creation is a balancing act over time NEW Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |