Join Warren Ingram as he covers the three fundamental steps to achieving a financially free retirement by: being debt-free, having an emergency fund, and generating sufficient investment income. We'll also demystify the choices between living and life annuities, explore the realities of early retirement at 55, and more.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Join Warren Ingram as he covers the three fundamental steps to achieving a financially free retirement by: being debt-free, having an emergency fund, and generating sufficient investment income. We'll also demystify the choices between living and life annuities, explore the realities of early retirement at 55, and more.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Welcome to Honest Money, your best guide to financial freedom. I'm Warren Ingram, the author of a few best-selling books, and I'm also an award-winning financial planner, and I've helped thousands of people on their journey to financial freedom. I'm not here to tell you what to do, but I am here to share my experience and the best ideas that I've learnt, and I hope these ideas help you on your journey to financial freedom.
Speaker 2:Hi Warren, my name is Joel and I have a question around the excellent rates that seem to be offered on guaranteed life annuities currently, when I look at your first podcast, as you did in January, you define financially free as having sufficient income to cover living expenses for the rest of my life without having to be employed or dependent on others. And when I look at my requirements to meet the above, I have my own living expenses, I have no children and I also have my mother's living expenses, whose costs I share with my brother, and my mom is 85 years old. I've always lived well with him. I have no debt. I've invested as much as I can over the years. I've maxed out my tax free savings accounts since inception 2015,. I'm currently maxing out my pension at work at 27.5% and my aim has always been to try and retire as early as possible.
Speaker 2:I'm now 55 and when I do the calculations that are on offer on all the retirement calculations that you find on internet with all the asset management companies, I'm still well short to achieving a 4% drawdown on my capital amount and I'm telling me I need to work for another five, six years.
Speaker 2:But if I look at the calculations and if I split the same capital amount between a guaranteed life annuity to cover my living expenses and then to take a separate living annuity invested in a 10-year long bond to cover my mom's expenses, I'm exceeding what I actually need. In fact, I'm netting more than what I actually weigh ahead of what I actually need. So I don't know if I'm missing something. I'm just really nervous to do this big step to take early retirement at 55. But if I look at what he's on offer at the moment, will I be stupid not to take this window opportunity of the great rates that have been offered through life annuities? Thank you, warren. I'd appreciate if you could give my question some consideration and thank you for the great show. I've downloaded all of your podcasts and I'm systematically working my way through all of them. Thank you for taking the time to always answer our questions.
Speaker 1:Hi, jill, thank you for your unbelievable question. I think it's really a powerful set of questions you're asking all in that one start which is have I got enough money, am I at financial freedom? And then, what are the best products? Most especially looking at a guaranteed life annuity now is it the right call for you to take retirement? So let's just reset quickly for a second to go back and look at the principles and then let's get into your question.
Speaker 1:Firstly, I think, just understanding financial freedom for everybody. Financial freedom is three steps. Number one, it's going to be debt free. Then, number two, have an emergency fund which covers three to six months worth of your normal monthly expenses. And then, number three, step three in the final step, is get enough income from your investments that they cover your lifestyle expenses over your lifetime. And so, listening to Jill's question, it sounds to me, jill, like if you're not there right now, you're very, very close and that's an amazing achievement to do that at age 55, especially where you've got kind of joint financial dependent between you and your brother with looking after your mom. So well done, and I think it's a heck of achievement. And so just taking the next step now, looking at what to do.
Speaker 1:So just explaining the difference between a living annuity and a life annuity very quickly. A living annuity says you take all your money from RA, a retirement annuity, a preservation fund or a provident fund and you put it in an investment called a living annuity. The law allows you to draw anywhere between 2.5% from that money to 17.5% per year as an income and you decide how much you're going to draw, but in that range, and you can change it once a year on the anniversary of that investment. In other words, if you retire on the 1st of December, then on the 1st of December every year you'll be able to decide how much to draw in that range of 2.5% to 17.5%. The money that you then have in that living in UTI is invested, usually in a life assurance or unit trust platform, and you have a lot more say in how that money is invested than when it was sitting in an RA or a pension fund or provident fund. So you can decide, for example, to invest 100% in a money market account, which I think is a really bad idea, but you can do that up to 100% in shares, which I also think is a really bad idea. So it's a good idea to have a diversified portfolio inside a living in UTI. So that's kind of the living in UTI and I know I'm brushing over it, but we have covered them before and then a life in UTI is very different.
Speaker 1:So what happens is you take the money from your RA or your pension or provident fund and you basically do a contract with a life assurance company where you say to the life assurance company here's my RA, it's worth two million rand, I'm going to sell you that two million rand. In exchange, you're going to give me a guaranteed income for the rest of my life. So the life assurance company, before the time, will give you a quote and they will say to you for your two million rand, we will pay you whatever it is. I'm just choosing an arbitrary number. Let's say it's 7,000 rand a month for the rest of your life. In addition to that 7,000 rand a month, what they will say is that there will be choices. You can choose to take an increase which is related to inflation. So they might say to you you get a CPI increase. Or they might say to you you can get a guaranteed percentage increase. In other words, it's not linked to inflation but you can get 5% a year, as an example, an increase on that income.
Speaker 1:Whatever the terms are that you agree with the life assurance company on day one of buying that life annuity. Those terms are set for the rest of your life. That's an important point. You can't change the deal once you've signed that deal. That is now a cost in stone. I've tried many times in the past to renegotiate terms with life assurance companies on behalf of people that I've met who have these life annuities, and they've never been able to change the terms. It's a contract that you sign for the rest of your life and the thing to understand about a life annuity is after, I think, an initial five-year period.
Speaker 1:In most instances, if you die let's say you retired 55 and you died at age 61, the money is gone. To be clear, the money is gone. That's part of the deal with the life assurance company, so they're going to honor the contract to you for the remainder of your life. If you have a very long life and you live to age 109, then the likelihood is that you will be winning in a contract like that, whereas if you die at age 61, then you probably would have lost out and you would have been better off elsewhere. So, understanding that life annuities, they are a calculated gamble, and so people who retire early. So if you are going to retire at 55, and you've got some longevity in your family, if your mom's 85 now and she's reasonably healthy, then there's a good chance maybe that she's going to live to age 90 or 95. And, Joel, if you're in that kind of a position where you're as healthy as your mom was at the same age, then there's a very good chance that you're going to live that long.
Speaker 1:Then you really need to think about a life annuity, because longevity is a big risk for all of us and especially if you're taking early retirement, then longevity is something you've got to worry about almost more than anything else. And then having a contract with the life assurance company where they take on the risk of your longevity is important. But we need to know that life insurance companies are not stupid, so they're gonna ask you a whole lot of questions before you sign a contract with them and they'll also try and figure out how long you're gonna live, and so what they'll be doing is paying you a bit less, for example, than, let's say, your friend, who might retire at 55 as well, but has been a heavy smoker, never exercised a day in her life, and drinks a bottle of wine every day. Then the life insurance companies likely to pay them out a bit more every month than they'll pay you because they expect your friend to die before you will. So, just understanding that there is always a calculation going on and the life insurance company employs many actuaries, does a lot of big data collection to try and understand how they can make money out of a deal like this. So this is not just kind of a gift from life insurance companies to you because they're nice people. They're doing this because they think they're gonna make more money than you will.
Speaker 1:Having said all of that, at the moment when interest rates are very high, it is the most attractive time to buy life annuities because they use those interest rates as a way of locking in the debt. So sorry, not locking in the debt, but locking in the monthly payments. And so if interest rates are high, they will buy bonds that have a long term at these high rates of interest and therefore they'll be able to pay you a bit more than they would pay you when interest rates are low. So it is worth considering.
Speaker 1:I think I just wanna say to you taking early retirement to 55 because rates are high, I mean, it's something you really need to consider very, very carefully. You need to know that you need kind of a big cash lump sum sitting elsewhere as well that's invested in unit trusts or exchange traded funds, because you need lump sums to buy new cars every five or 10 years. You need money to kind of maintain your property. Even if you live in an apartment, you need to fix that apartment from time to time, pay special levies or whatever it is. Or if you get an unplanned medical expense that's not covered by medical aids, all of those things are going to be part of the deal. So I think if you're considering early retirement and your retirement funds are kind of your main asset and you don't have another lump sum, then I would really consider kind of just delaying for a year or two to build up a bit more cash that you can use to find yourself with the unplanned expenses at retirement.
Speaker 1:And maybe my last comment is this is a podcast, it's done within nine minutes of talking you might want to pay an advisor a random amount to kind of give you a retirement plan to do a sanity check for you. That's no bad thing to spend a few thousand Rand to get independent advice and make sure that you're doing the best thing for yourself. So I hope the podcast helps, but I'm going to really urge you to pay someone to give you a good, independent view. Thanks, jill, and good luck with your decisions.