The most important retirement decision - what if I get it wrong?

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of 10X Investments.

We’re all guilty of making the wrong decisions, perhaps me more so than most. The stakes just aren’t that high a lot of the time, so who cares if get the wrong colour pencil case for my kiddo or go slightly too fast on a road where I know there is a speed camera (I returned the pencil case and paid the fine – you have to make it right, after all).

But, as I get closer to retirement – cough, cough, not that close okay – it’s even more important to make the right choices with my investments. Warren Buffet I am not. If I get it wrong in the lead-up to the big relax I have planned, I might not be so relaxed.

Side note. The Bloomberg Billionaire Index lists Buffet’s net worth as $161. Let me write that out in Rands for you quickly: Two trillion, nine hundred and forty nine billion, eight hundred and forty two million, eight hundred and seventy three thousand and six Rand. And forty cents.

And now back to you and me and our life choices.

First off, I need to pay serious attention to that fact that people I know, including my dad and some others, are living longer. Granted, the average person in South Africa will die at the oddly specific age of 61.48 years old (thank you Google and World Bank stats). Yes, we have a dearth of adequate healthcare in remote parts of the country and massive inequality. So perhaps a better gauge is the fact that South Africans on the whole are living for nearly a decade longer than they were in the 1960s.

So unless I die unexpectedly or through my cat’s plans to take over the world, I can expect to live longer than I would have previously. Looking at my parents’ generation, that’s 80 years or more.

(My daughter, bless her cotton socks, said on Mothers’ Day she hoped we had another 60 such days to spend together. I’m going to last, but maybe not that long)

It’s clear that I need to really understand the pension options available to me, in order to keep me living as close to the style to which I have become accustomed. Assuming I’ve put enough away over the years to actually retire, my next step is to consider either a living annuity or a life annuity.

These are two totally different products, although both are a way of providing me with income when I finally put my pen down and start reading for fun again. So, what are each of these?

Living Annuity

A living annuity allows me to draw income from my investments while keeping my capital invested. The income drawdown would be between a minimum of 2.5% and a maximum of 17.5% of my capital per year, paid monthly, quarterly or yearly.

The good thing about a living annuity if that I can adjust my income each year if circumstances change. In my case, it’s probably going to be the inflationary fluctuations of vets bills. Also, I get to decide where my money is invested, I can change investment vehicles (i.e. change the underlying funds or even switch to a guaranteed annuity if I feel like it), and importantly, if I die before I spend it all, I can bequeath what’s left to the kiddo.

The downside is that I don’t get a guaranteed fixed income. If an investment performs poorly, then I won’t have the same amount of income as I had before, unless I adjust my drawdown to a higher percentage. And drawing down too much too soon can potentially deplete my capital. Furthermore, I’m ultimately responsible for the investment. Which seems like it could be stressful sometimes.

Life Annuity (also called a guaranteed annuity)

A life annuity offers more certainty, but there are significant downsides too. I basically give all cash to an insurance company and they my pay me an agreed upon amount until I die. It can grow at a rate linked to inflation or a predetermined percentage. But I get to make that choice once and only once.

If I did choose to go this route, I’d go with the predetermined percentage. Especially as I can’t change my mind later if the cost of living spikes like it did a few years ago, which would effectively erode my buying power.

I’m also wary of the official inflation number. The latest figures put inflation at 2.7%. I really don’t believe that the cost of living only went up 2.7% over the last year. I seriously question how this is measured. Have you seen the price of milk?

An advantage of this route is that I can’t die before my money runs out. But, when I do finally shuffle off this mortal coil, the insurance company will keep all my cash. Yup – you read that right. Nothing for the kiddo.

How to make the choice?

So, living annuities have a life of their own and nothing is guaranteed, they allow me to choose my own adventure, possibly grow my savings, and transfer my wealth (such as it is) tax free when I die. Life annuities on the other hand are safer, in that I’ll always have a set amount of cash on which to live.

One gives far more flexibility and is riskier, while the other provides more certainty with far fewer options (and ultimately, while not subject to the risk of the market, is still subject to inflationary pressure). Or, I could consider the middle ground and take a blended annuity approach, which gives me access to both.

I’ve made a lot of bad decisions (particularly with speeding tickets). And I don’t want to get this one wrong. A good idea is always to get the facts from a professional with a lot of experience. I can talk to the investment consultants at 10X at no cost (they’re retirement experts) or I could consult a financial advisor. But ultimately, it’s my decision, just like it’s yours.

Take your time, do your research, and don’t do anything just because someone else tells you to. You’re not buying a pencil case!