Following the income thread of my previous article, this week I will cover sustainable income drawdown rules for retirees. Below is the FSCA guidelines for sustainable income drawdown rates for living annuity pensioners. The same drawdown rates would apply to a retiree drawing an income from a discretionary investment portfolio.
ASISA stats indicate the average drawdown rate for living annuity pensioners is c. 6.5% per annum. Keep in mind averages can be very misleading as the average includes those wealthy retirees drawing only the minimum income of 2.5% and those desperate retirees drawing the maximum income allowed under living annuity rules, which is 17.5% per annum. I would wager a bet if you looked at individual retiree numbers those drawing above the average rate would far exceed those retirees drawing less, which is indicative of the retirement bombshell facing SA.
Living annuities get a bad rap from the regulator owing to the flexibility of the product, which allows the retiree to decide on the level of income drawn of between 2.5% – 17.5%. The regulators concern is understandable particularly where you have a less sophisticated investor who may not understand the implication of drawing a higher income, which ultimately sees the retiree run out of money. However, many retirees with a clear understanding of the implication of drawing too much have no option, but to draw an unsustainable amount simply to cover their basic living costs.
Rules of thumb are dangerous, but a good rule is not to exceed 5% drawdown rate in your 1st decade of retirement increasing to a max of 6% in the 2nd decade. Of course, an appropriate drawdown rate is dependent on the underlying investment strategy, which is linked to the investors personal risk / return budget and life expectancy.
Retirement drawdown rules are not to be used as a “one shoe fit all” tool and should be viewed with caution. I strongly recommend anyone considering a living annuity in retirement seek professional help preferably from a Certified Financial Planner CFP®. And remember retirement planning should not start in the year of retirement, but in the 1st year you start working!
Mcomm, CFP®, HdipTax
T. 021-205 1133