In order to determine the most appropriate retirement income strategy for you, one would need to look at your total financial situation, e.g. whether you have any dependents and any other investments or sources of income. A critical factor to consider is your current age, as the income from your retirement fund will need to last for your whole life.
There are a number of potential threats to your income and financial security post retirement:
• You may outlive your income
• Your income may not keep up with inflation, so that your standard of living declines
• Negative market conditions may impact your investments and/or income
A fixed pension will provide you with an income for life, but it is critical that you purchase one with annual increases in income, preferably linked to inflation; otherwise your income will not keep up with your living expenses.
A living annuity does not provide a guaranteed income for life, but do allow more flexibility with regards to the level of income you withdraw (between 2.5% and 17.5% of the investment value at that point). However, if the initial level of income selected is too high and increased annually by inflation, the withdrawal percentage will at some point be capped at the maximum, after which it will not be possible to increase income by inflation any more. Income may even start reducing.
A wide range of investment funds are available for living annuities. Choosing an appropriate investment strategy is important, as you will need to balance earning an investment return that can support annual increases in income, and limiting the volatility in the investment value. A significant fall in investment values may have serious consequences for the level of future income that can be sustained.
Retirement income choices are complex and the decisions you make will have serious implications for your financial security in retirement. It is therefore recommended that you speak to a registered financial advisor that in order to determine the most appropriate strategy given your specific situation.
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