How conservative is conservative? This question presents a conundrum that’s pretty much on par with the rhetorical how long is a piece of string?
The industry advises that when it comes to investing your retirement savings post-retirement, one should err on the conservative side as time horizons are too short to ride out market volatility. Reducing your exposure to a market crash is crucial – a retiree relies more on return than risk to cover their monthly expenses for the (un)foreseeable future.
So let’s approach this topic from a different angle: Can your money grow while you’re withdrawing an income as a retiree?
The short answer to this question is yes. During a recent chat with a retired acquaintance, the conversation turned to how they manage their finances. He retired at 55 and today, 18 years later, he has more money in his living annuity than the day he left his employer. He kept his drawdown rate at 4% and met with his financial advisor once a year to review his investment.
But it depends
It also helped that the retiree in question paid off his house and has been driving the same car for more than 20 years. In addition, he had other sources of (nominal) income to support his keeping to the 4% rule. However, these sources of income were only present during his first 10 years of retirement. From there on, he relied on the interest received from an RSA Retail Savings bond – an investment that was made after a policy he took out years ago, paid out.
This brings me to RSA Retail Savings bonds. It’s a great vehicle for discretionary savings, as it offers solid bang for your buck. Its inflation-linked bonds offer stellar returns, with the 3 year now offering CPI +4%, the five year CPI +4.5% and the ten year CPI +5%. Read more about it here. Simon also wrote this post on a dividend portfolio that pays monthly to supplement your income.
Freedom to choose – with caution
My acquaintance bought a living annuity upon retirement. And the investment rules are slightly different for living annuities as this product isn’t governed by the Pension Funds Act. For example, offshore exposure isn’t limited to the recently updated 45%.
(A quick sidenote: If you were part of a pension fund or provident fund (i.e. a workplace-based fund), annuitisation options include in-fund annuities and out-of-fund living annuities. We discuss the differences between these two options in this post.)
Therefore, living annuities give investors freedom in how the underlying investments are structured. However, this freedom should be treated with caution. There are hundreds of products, options, investment vehicles and approaches out there, and it’s best to navigate these waters with the support and guidance of a qualified financial advisor. Determining the underlying investments of your living annuity depends on a host of variables that are as unique as you are: What are your investment objectives? Are you able and willing to take risks? Most importantly, will it beat inflation, and provide an income (and even growth) within the timeframe available to you?
It really does depend on you
In closing, I reached out to a qualified financial advisor for his opinion on this topic. I was hoping for straightforward advice that I could share with you, but his answer captured this conundrum best: “It depends.”
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.