Deciding when to retire is a massive decision we will all face one day. Apart from preparing ourselves for the lifestyle changes that come with stopping work, we must also make some decisions about our retirement investments. One of these decisions is choosing a life annuity of a living annuity for our retirement funds.
Let’s first look at each of these products.
Life annuity: Life annuities are insurance or investment products that provide the beneficiary with fixed payments at regular intervals—either monthly, quarterly, annually, or semi-annually. Life annuities are generally sold by insurance companies. They essentially act as longevity insurance, as the risk of outliving one’s savings is passed on to the annuity issuer or provider. There are many different types of life annuities, but the basic principle with them is that once bought, you are locked into their rates forever, and these rates/incomes are guaranteed.
Living annuity: A living annuity provides a selected income from your retirement proceeds. Your retirement funds are invested, and you have investment choice; it enables you to adapt your income annually, allowing you to balance your income and capital preservation needs. The biggest feature of a living annuity is that you have a certain amount of control over your funds and income; there is normally no guaranteed income.
Over the last few years, there has been much debate around which annuity is better for retirees. Today, we can even purchase a “hybrid annuity” that combines the characteristics of both.
Unfortunately, there is no simple answer to the question of which will better serve you as there are so many things to consider. I believe the single biggest consideration is asking yourself is:
- Do you have a proper long-term financial plan that considers how you want to live your life through retirement and
- Do you work with a financial planner and planning firm that will be around for your retirement?
As we live longer and healthier lives, it makes sense not to lock oneself into a product with little flexibility. Being able to adjust as life happens can greatly benefit us and those who depend on us.
I believe there is a place for both products in certain situations; however, making the decision around your personal plan makes the most sense.
Dirk Groeneveld, Certified Financial Planner
t. 083 261 9287