Defer retirement and reap the benefits

Postponing retirement and continuing to save and work can have a significant impact on the income you enjoy in your golden years said Allan Gray this week. “While deferring retirement is not the most attractive notion, it has a doubly positive impact in that you have more years to save, and fewer years to live off your savings,” said Richard Carter, director of Allan Gray Life.


For example, if you retire at 60, earning R400 000 per year, and you have retirement capital equal to 12 years of final salary, you could expect to draw around R250 000 per year (increasing with inflation), or 62% of your final salary. By continuing to work and save for another five years, you could instead hope to retire with 85% of your final salary, a substantial difference. These numbers are based on various assumptions*. Changing the assumptions changes the numbers, but not the key message: you need to be realistic about how much capital you require to be able to enjoy an income in retirement close to what you had when you were still working.


Carter advised  investors to examine their circumstances and talk frankly with their financial advisers about their options well before they retire. Putting all the facts on the table may be a painful exercise, but the sooner this is done, the more options there will be to work with.  


“Be realistic about how much you have saved and your potential lifespan. This will help with developing a plan that accounts for the key risks retirees face – the risk of outliving your money, and the risk of inflation eroding your buying power over time.”   


Allan Gray said that most people have not properly prepared for their retirement by saving enough.  As a result, they are relying on their pension providing product to solve this issue, with many  choosing the relative flexibility of living annuities, instead of conventional life annuities, hoping that potential market returns will make up for their lack of capital.  


Living annuities allow you to select an income level within certain legal parameters, and to change this level annually. If you retire with less than you need you can temporarily solve the problem by drawing more of your capital than is sustainable. While this may work for a few years, Carter said it’s really just ‘kicking the can down the road’ and deferring the pain.  
“With the possibility of living a lot longer than you might expect being a key risk to your financial health, it is advisable to consider limiting consumption in the early years of retirement.” You could also opt to use a conventional life annuity, or to transfer into a conventional life annuity later in life.


Conventional life annuities are the only products that offer retirees guaranteed income for the rest of their lives.  “The problem faced by today’s new pensioners is that income yields are currently low and therefore guaranteed products are an expensive way to buy a pension, especially one that adjusts for inflation,” pointed out Carter.


“Low yields are outside of our control.  Even if yields recover and annuities are more attractively priced, no product can magic a tiny nest egg into a bonanza. However, careful planning and sound investor behaviour can go some way to managing the problem,” he concluded.   


* Assumptions: Capital invested in a living annuity, income increasing in line with inflation at 6% until age 90 where the cap of 17.5% is reached. Investment return, after all fees, of CPI +4%