I'm retiring soon - what are my options now?

Is retirement around the corner for you? You may have visions of long days lazing on the beach, or maybe you're counting down the months before you launch yourself into a new venture or passion project. Whatever your plans are, it's important to realise that even if you're no longer working fulltime, it's still essential to save for an income.

When retiring from a retirement funds, like a preservation fund or pension fund, you're required by law to invest at least two thirds of your investment in an income generating annuity. Here, you have some distinct options:

Life annuities - more certainty, but with limits

Also called 'traditional' or 'fixed' annuities, you invest your money and in return receive a guaranteed regular income for life. You can choose a number of options on how this income is structured, such as by how much it grows each year. Discovery's Fixed Annuity is an example of this kind of annuity. Some life annuities, known as with-profit life annuities, guarantee an income and some exposure to investment growth.

Guaranteed annuities are insurance type products, in that they insure you against potentially poor investment returns and the risk of outliving your retirement savings.

Knowing you're assured an income for the rest of your life offers great security, but remember that a life annuity ends as soon as you pass away. It's possible to link your spouse to the life annuity so that your spouse will continue to receive an income if you pass away, but this comes at an extra cost. You can also choose to add a guaranteed term to your life annuity, which would guarantee that the income pays for at least a set number of years to your loved ones, but this also costs extra.

Other factors that can impact your monthly annuity income include your age. The younger you are at retirement, the lower your monthly income, as you'll likely need more money than someone who retires later in life. Gender can also play a role; because women generally have a higher life expectancy than men, so they often receive a lower monthly pension than men.

Living annuities - less certainty but more flexibility

Also called 'linked annuities', living annuities operate more as an investment pool than as an insurance product. When you retire, you can invest your accumulated savings in investment funds of your choice and draw an income from this that is not guaranteed. Discovery's Living Annuity is an example of this kind of investment.

When you invest in a living annuity, you can choose how often and how much money to take as an income, based on a predetermined minimum and maximum amount. Currently (2021) by law, you are required to withdraw between 2.5% to 17.5% each year from your living annuity, but the choice of how much between these limits and how often you receive an income is yours.

This means that how long this investment fund lasts depends on how much you withdraw and the performance of the funds that the capital is invested in.

The benefit of a living annuity is that you have a lot more flexibility in choosing the income you want to receive in retirement. This is important as your income needs may change in retirement, say in response to a change in your health. With a life annuity, by comparison, there is no flexibility to change your income should you need so.

Also, when you die, any remaining money left over in your living annuity will pass to your loved ones. So, for clients who manage and invest their money well, your loved ones can be left with good inheritance.

The danger of this type of investment is that if you set the income level too high and withdraw too much, especially early on, you'll use up your money too quickly. This is especially true now as medical innovation means that life expectancy is rising. In other words, the chances of you living for longer are higher, so withdrawing more responsibly is crucial. Also, if your investment funds do not perform well, this may result in your money depleting faster.

The Association for Savings and Investment South Africa (ASISA) recommends the following: If you invest in a living annuity, you should withdraw no more than 5% annually of the value of your residual capital (this is the funds you have left each year). This can help ensure that your pension is sustainable.

It's best to seek financial advice

There are many options to choose from when retiring. A financial adviser who understands your personal situation, needs, and the options available will be able to help you choose what's best for you. That's why in situations like this, it's best to seek professional help.

This article is not financial advice. Please consult with a financial adviser for financial advice or click here to leave your details.