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The Money Show’s Stephen Grootes talks retirement income with personal finance expert Warren Ingram.
We would surely all like to be able to retire with financial independence, and not worry about our income during those so-called golden years.
One of the biggest financial decisions we’ll have to make along this journey is how we will be paid from our investments once we do retire.
For most, the bulk of our income will come from our retirement funds, says personal finance guru Warren Ingram.
And a very important choice is whether to take a variable income from our investments or opt for a guaranteed monthly income for life.
“A monthly pension is something that probably our parents or grandparents would have known about – you get a guaranteed income and you know exactly what the amount is and you hope it goes up with inflation every year. The alternative is a living annuity… and the outcome that you have there is quite variable.”
Warren Ingram, Director – Galileo Capital
“We’re faced with that choice when we hit retirement… It’s a big one and we need to pay attention to it.”
Warren Ingram, Director – Galileo Capital
To help you figure out what will be best for you, Ingram shares some valuable pointers.
HOW TO GET A GUARANTEED INCOME FROM YOUR RETIRMENT INVESTMENTS
When you retire, you have the option to take your retirement capital and buy a guaranteed pension – often called a life annuity.
It offers the surety that you’ll have a fixed income for the duration of your life.
Some options will offer an annual increase based on inflation or a fixed escalation e.g. 5% per year.
If you’re married, your spouse might get a portion of the income on your death e.g. 75% of the pension amount.
No money will be paid to your children when you’ve both passed away.
HOW TO GET A VARIABLE INCOME FROM YOUR RETIREMENT INVESTMENTS
When you retire, you can convert your retirement annuity (RA), provident fund, or pension fund into a living annuity.
You are allowed to draw a range of 2.5% to 17.5% from the value of your investments every year. You can also change the percentage once a year.
If you die, the whole value transfers to your spouse or beneficiaries.
If the value of your capital falls, your income will fall at the anniversary – it will also rise if your capital rises.
HOW TO CHOOSE BETWEEN THE TWO OPTIONS
If your income requirement is a big percentage of your retirement fund i.e. more than 5% at the time of retirement, you might want to consider a guaranteed annuity.
If you have a large retirement fund and you want to ensure that your family inherit some of the money, go for living annuity
If you want more control over the investments of the money, especially the amount that is allocated overseas, a living annuity offers more choice
You can start with a living annuity and then convert later in life.
Interest rates play a huge role in the income from life annuity – low interest rates deliver a low retirement income.
Health also plays a big part – if you’re retiring relatively young and have good life expectancy, a life annuity might be better.
To hear Ingram’s detailed advice, listen to the interview audio at the top of the article
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