Retirees in the lower buckets (those drawing between 2.5% to 5% and 5% to 7.5%) generally did not have to draw a higher percentage to sustain their income in real terms, but people drawing between 7.5% and 10% (roughly 18% of policyholders) had to increase their drawdown to between 10% and 12.5%.
For the latter group of people, investment returns were not enough to sustain their drawdowns and they had to start drawing more capital, Moore explains. Anybody who drew more than 10% five years ago, migrated to the maximum drawdown category of 17.5%.
“I think what that highlights to us is it is a very slippery slope. Once you start drawing your capital – once you get above that 10% drawdown rate – it has only taken them five years to move from that to the maximum drawdown and now their income will start falling in real terms.”
The problem is that a sizeable portion of people drawing 17.5% are still relatively young, and may still need to sustain themselves for a long time.
Moore says in an environment of lower expected investment returns and people simultaneously starting to live beyond their life expectancy, an increasing number of people will face this issue.
And for women, who live longer than men on average and who may also be married to older men, this is a significant problem as they may be faced with a meaningful deterioration in real income levels while they still have years to live once their husbands pass on.
With only a small portion of South Africans in a position to sustain their standard of living in retirement and an estimated 90% of retirees choosing living annuities, critics have argued that people should rather choose a guaranteed annuity at retirement, which guarantees a certain level of income regardless of how long pensioners live.
But Moore says the solution doesn’t need to involve one product or the other.
He says instead of thinking of retirement as one pot of money that needs to last for life, living annuity investors can think of it as two pots – one to provide a minimum level of income to sustain an adjusted lifestyle in retirement and that covers basic needs such as accommodation, food and medical services for life. Any assets available over and above this can be invested for long-term growth.
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