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SIMON BROWN: I’m chatting now with Andre Tuck, senior investment consultant at 10x Investments. Andre, I appreciate the early morning time.
I’m thinking around retirement and the fact that the vast majority of South Africans, 90%-odd, are going to struggle in their retirement. In a recent note that you put out, you talk about it seldom being a single big decision that makes an impact on our retirement.
It’s actually a lot of smaller decisions that we make along the way – and when we get to retirement.
ANDRE TUCK: That is correct. Morning, Simon. The challenge is rarely a single decision, as you’ve just alluded to. It’s often a combination of insufficient savings, high fees, unrealistic retirement expectations, poor drawdown decisions that compound over time – and also the cost of living in retirement that plays a crucial role.
SIMON BROWN: There are some big decisions when we get to retirement. Perhaps one of the biggest decisions we have to make is around that living versus guaranteed annuity. The one guaranteed is essentially an insurance product. It’ll pay us out according to the Ts&Cs. The ‘living’ one is an investment product. These are irreversible decisions that we need to make.
ANDRE TUCK: Definitely correct. The life annuity is a guaranteed income for life. The insurer carries the investment in longevity risk, but you do not have flexibility.
The living annuity gives you money invested and gives you control. It’s allocated, and obviously you’ve got the flexibility of the drawdown between 2.5% and 17.5% per annum, which you can change once a year.
Read: Choosing between living and life annuities: What every retiree should know
But there is also a downside to that. If you draw too much too soon or your investments underperform, and if there’s a sideways or downturn in markets in the early years, that will have a negative impact.
Many people make the call based on what works right now – a higher initial income or the appeal of flexibility – without considering what that decision might mean later in life.
SIMON BROWN: Yes, I get your point on that, absolutely. It’s thinking around to the point of hitting retirement. We’re potentially living, I don’t know what, 20 or 30 years [more]. This isn’t a couple of rounds of golf and it’s all done. Drawdown rates also matter.
It might be attractive to push it higher, particularly when we’re early into retirement. We want to go and do all those things we couldn’t do [before]. There are holidays and all that sort of stuff, but it is also [important] to be careful to try to keep a drawdown around 5%.
ANDRE TUCK: Definitely. There are studies based in the US, but we also need to factor in what’s applicable to the South African market and South African context specifically.
So we’ve seen a lot of advisors now sticking to the 4% rule; if we draw too much early on, that can come back to haunt you later.
That discussion is a very hard discussion to have – 5% or 4%, or less. Many clients do take this very, very seriously and do that. The ones that don’t find it comes back to bite them.
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SIMON BROWN: Yes. You made a point in the article you wrote that we always think that retirement is going to be cheaper. In some ways it is. Firstly, I’m not saving for retirement anymore, so there’s that saving.
But there are other costs. I mentioned we want to have fun. Eventually there are healthcare costs. Healthcare later in life is going to be a huge burden on your potential savings.
ANDRE TUCK: Definitely. There’s an assumption that your costs are lower in retirement. It’s one of the most damaging myths in financial planning. We’ve seen that non-communicable diseases in healthcare costs increase with age.
There are three stages. The early years of retirement tend to be the most expensive. You travel, spend money on leisure, lifestyle. And then there’s a quieter middle period. And in the end there is a sharp and often unexpected rise in care-related healthcare issues.
If you retire from 60, 63, 65 already, you need to plan accordingly.
Read:
Retirement is no longer an age – it’s a phase: Planning for multi-stage retirements in SA
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SIMON BROWN: Yes it is so. There are actually different stages in it. You mentioned upfront fees. We understand fees when we are investing and saving for retirement. Fees matter. Fees still matter in retirement, particularly.
In a guaranteed annuity it’s a different kettle of fish, but in a living annuity there are fees and those fees are still hugely important.
ANDRE TUCK: Definitely. Fees are the silent killer of wealth. They’re also the most underestimated variable in this whole retirement planning process, because they are the most difficult to see clearly because they’re so layered.
Few understand the full impact of cost on product and platform and financial advisor. The fees are not always visible on your statements, which is exactly why they do so much damage over time.
So one needs to ask for that EAC, the effective annual cost, from your financial planner when you go into retirement on your living annuity – what the layers of cost are – so that you clearly understand them from day one.
Read: Retirement income: Let’s talk about fees
SIMON BROWN: That EAC, the effective annual cost – that is apples with apples. Everyone’s going to come back with the same bundle of fees. The numbers will be different, but what’s included enables us to give a good comparison. And that’s the key point of that EAC.
ANDRE TUCK: That’s 100% correct, 100%. I think it’s very important that one scrutinises and asks that very, very important question. Too many times I’ve seen that a client comes back three, five six months later.
‘I didn’t understand there was initial financial advice fee that came off my investment, but now it’s already been done.’ So you’ve got to ask those questions, ask the questions, the hard questions, and then you have peace of mind if you understand them.
SIMON BROWN: Yes. And it comes back to the point you made earlier. There are a lot of big decisions to be made here. We need to make them smartly. We need to make them smart the first time, and ask the questions. If you’re not sure, ask and then ask and ask until it does start to make sense.
Read: Fees a principal destroyer of building wealth
We’ll leave it there. Andre Tuck, senior investment consultant at 10x Investments, appreciate the early morning.
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