172 - Beating the boon of surviving retirement

Question: My wife and I retired seven years ago and are finding it increasingly difficult to come out on our budget. What should we do?

Answer: There are many pensioners who are in the same situation as you are. There are two main reasons for this: 

• Pensioner inflation is higher than your pension increases. 

Items like medical aid premiums and electricity which make up a significant part of a typical pensioner’s budget have increased by a lot more than your pension has increased.  

• The investments have a short term focus

The portfolios many pensioners use aim at preserving capital over the short term. The problem here is that there is not enough growth over the longer-term. As 1 in 10 of us is likely to live to 100, we need to ensure that the funds can last for 30 years.

There are a couple of solutions for you to consider: 

• Restructure your living annuity portfolio

You need to introduce a growth element into your investment portfolio.  A model that I use for some of my clients is as follows: 

Each year, you should rebalance this portfolio with the help of your financial planner.

Another option that you can consider is to look at a portfolio that targets a high return but uses guaranteed funds and hedges to reduce the downside risk. 

• Guaranteed life annuities

Guaranteed life annuities are still a great deal.  If you convert your living annuity into a guaranteed life one, as a 70-year-old, you will effectively be locking in a return of around 12%. This can make a significant difference to your retirement income.

I have noticed that the income that you can get from a guaranteed life annuity has dropped each week since the election so if you want to do this, you should it sooner rather than later in order to lock in these rates before they drop further. 

• Reduce the tax you pay

If you have funds that are not retirement funds, you can use them to provide you with some of your income.

The big advantage here is that most of the income you receive from these funds will be classed as a capital drawdown and not attract income tax. The part that is taxable will only attract capital gains tax which is less than half your tax rate.  By using these tax structures to your advantage, you can increase the amount of income that you can access from your savings.

When using your non-retirement funds to generate an income, you must ensure that you do keep enough funds available for any emergencies.

Managing your assets to generate the right level of income that is sustainable into the future, can keep up with pensioner inflation and is tax efficient, requires some expertise.  I would strongly recommend that you discuss your situation with a financial planner.

Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives.  You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za