I am 60 years old and contemplating retirement/retrenchment.
I have accumulated a sizeable amount over the years in my pension fund. I will draw my monthly expenses from a living annuity retirement fund.
I would like to continue investing in a medium to high risk portfolio. However, market slumps are a bother and I would like to invest 20% of my funds in a low risk portfolio.
The question is: when the market slumps, can I draw a monthly annuity from the 20% low risk portfolio and not touch the riskier investment until the markets are stable again?
Craig Aitchison, general manager of corporate customer solutions for Old Mutual Corporate, responds:
Managing your investment risk after retirement is becoming an important aspect of retirement planning. This is because you end up crystallising the losses your investments make during slumping markets each time you make a withdrawal – the money is taken out of the investment and is not there when the markets rebound again.
Usually when you drawdown from a living annuity, the drawdown is taken from the whole investment portfolio, not just a part, so an approach of drawing down from conservative investments at one time and aggressive investments at another is hard to implement.
Also, there is the challenge of knowing when you are in a difficult market and when you are about to rebound. Hindsight is perfect but it is hard to predict what investments will do (and hence which portfolio to disinvest from) in the thick of the moment.
However, a balanced investment actually achieves the same goal, because it is made up of a combination of conservative investments (low growth but less susceptible to losses) and growth investments. This diversification of investments has a couple of advantages.
First, it reduces the overall investment risk you have to take, without sacrificing returns. It also gives you flexibility to increase or decrease the amount of growth assets. If you have a living annuity, you should be reviewing what the investments in the living annuity are on an annual basis together with your financial adviser.
You can then refine the investment strategy to take into account your view of how markets are doing.
Beware of making radical changes, though. History has shown that sticking to a balanced strategy is way more successful than trying to chop and change in order to time the investment markets.
It is always a good idea to speak to an impartial financial adviser who will be able to give you more details on living annuities, how to set them up and whether you could indeed have multiple annuities, which would be another approach to consider.
- Fin24
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