There comes a point in retirement where the lump sum invested at retirement cannot keep pace with the income that a retiree is drawing. In the first few years of retirement the lump sum invested continues to grow but after a few years, the growth of the investment cannot keep up with the income a retiree is drawing. The point where the income drawn exceeds the growth on the investment will depend on how much the retiree is drawing as an income, and this can occur anytime. I have read that in order to prevent the bell curve taking place, retirees need to draw no more than 4% from their living annuity.
If you have retired and chosen to invest your compulsory retirement savings into a living annuity you have to choose an annual drawdown rate (or income rate) of between 2.5% and 17.5% per annum. The higher the income the faster your living annuity will be depleted. Initially, the growth in the living annuity will outperform the drawdown of the living annuity, and in many instances the living annuity will continue to grow whilst in retirement. But there comes a point when the growth cannot keep up with the income level and the living annuity starts to level off and then starts to decrease. Ideally you should not draw down more than 4%, but for the majority of South Africans this is not a reality as they do not have enough saved or an income of 4% is just not enough to sustain their current lifestyle.
The average South African retired person draws an income of 7-8% in which case they will hit the bell curve. Unfortunately, this often coincides in a time when they require more medical care and or
frail care, placing a further financial burden on their living annuity, fast depleting their investment. When my clients first retire they plan to leave a legacy for their families. They plan to draw an income whilst in retirement and at death, and leave money for their children or grandchildren as a legacy. But as they get older, the reality of drawing an income, the high cost of medical care and frail care starts to set in as they see their retirement provision dwindling. Leaving a legacy becomes less of an option and the reality of their retirement savings not being sufficient for their retirement, starts to set in.
More and more clients are looking at alternatives that will provide them with lasting, long term real income solutions. The retirement industry has had little to no innovation and clients are looking for alternatives. There are a few alternatives which range from changing the underlying funds to high yielding dividend shares and drawing the dividends as income, matching the income drawn to income produced or changing the living annuity to a life annuity or a hybrid of both. Retirees are living longer as advances in medical science increase life expectancy. The retirement age remains 55 to age 65 and there has been little or no innovation in the retirement space, failing to contend with the hard reality of running out of money.