Originally posted on 16 May 2011
This is possibly the most important question that a financial planner helps their clients to answer. You may have seen the recent advertising on TV regarding “future proofing your retirement.” The annuity products mentioned in these ads are one potential option. In this WealthPartners blog entry, we will look at the pros and cons of some of these options, in comparison to a traditional share market strategy.
In order to begin considering what you will need for your retirement income, first you need to know how much you’re going to want to spend in retirement. In addition, you need to estimate how long you are going to live. When you are approaching your retirement, these questions can be crucial but difficult to answer.
When it comes to your retirement income investments, you have a number of options. On one hand, you could choose an annuity. The advantages of an annuity are that you are provided with a pre-determined level of income for either a set number of years or for the rest of your life. This provides significant peace of mind because a share market crash won’t sabotage your carefully considered retirement plans. Annuities offer the certainty of ensuring that you have money coming in every year of your retirement, even if you live longer than you might have expected.
However, there are also some disadvantages. Annuity products offer a return based on the expected interest rates during the term in which they will be paying you income. Since interest rates are variable, the annuity provider needs to hedge their bets and set their price based on an assumed low rate of interest.
Also, because annuity products offer a guaranteed income, they are often inflexible. If you need to withdraw a lump sum of money, there are penalties and you could end up with a lot less money than you expect.
As an alternative to an annuity, your retirement investments can be structured to help insure against the risk that you might outlive your money. Constructing a retirement fund with a growth portfolio in a range of assets (other than shares) can ensure that when the share market goes down, your other assets might help to compensate, smoothing your return. In addition, holding some of your money in cash or term deposits can provide a stable source of funds that you can use to provide income while waiting for share markets to recover.
No one approach identified here is right for everyone. There are many reasons for choosing one strategy over another, and most clients will generally be more comfortable using a combination of strategies. If you would like to know more about which strategy is right for you, give a WealthPartners financial planner a call today on (02) 9955 1988 to start planning for peace of mind in retirement.