By Anja van den Berg
Regardless of age, we all need to consider our retirement plans. The available options didn’t change a lot for many years; people could generally choose between a life annuity and a living annuity to provide them with a regular income. However, the good news is that the retirement landscape has evolved, and choosing an annuity for retirement is no longer an ‘either or’ decision. Blended annuities might be what your retirement income needs.
Just SA, a retirement income and life annuity specialist company, unpacks the reasoning behind blended annuities on their website:
With living annuities, retirees have some degree of flexibility over how their capital is invested and how much they take as income each month. However, this means that many South African retirees who invested in living annuities risk outliving their savings. To enjoy a steady income throughout retirement, the industry rule of thumb is to only draw down a maximum of 4% of capital as income each year. Yet, many retirees are drawing down much more.
One way to better manage the higher risk of living annuities and the rigidity of guaranteed annuities is to use a blended annuity. This product provides the best of both in one and research has shown that combining a living annuity with a life annuity is a better solution for retirement than either on its own.
Unlike having two separate products, blended annuities allow you to structure a suitable portfolio over time, balancing the trade-offs of essential and discretionary spending as they arise. For example, you could switch additional tranches into the life annuity component when you need to increase the guaranteed income portion as you age.
The power of blending allows you to secure a guaranteed income for life to cover essential expenses. Simultaneously, it also permits you to maximise the long-term growth of the rest of your capital to meet luxury expenses or leave a legacy to your beneficiaries.
An added benefit is that a blended annuity removes the threat of increasing drawdown risk (having to draw more of your living annuity money as your money runs out). This is because the stable income from the guaranteed life annuity component provides a safety net. So, if assets you are drawing from the living annuity portion ever become depleted, your income from the life annuity will never fall below the guaranteed income level.
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Foto krediet: Towfiqu barbhuiya | Unsplash
