Retirement: What Income will I Get?

I'll get How Much?

In the previous section we worked out how much money you will have at 65, valued in today's Rands. That's half the battle. We now want to work out what kind of income that will give us. Lets assume that most of us will live past 65 for more than 20 great years.

I may be going through stuff that you already know, but please bear with me. If I don’t go down this path with you then chances are the numbers I talk about in Part 3 (where I share the road I am going down) won’t make sense, and that will invite far too many protests. Please bear in mind that I am not selling anything, just publicly exploring a problem that so many of us seem to have.

At this point we must talk about annuities. (Nothing to do with Retirement Annuities, which are products that let you save some tax en route. Introduced by Donald Gordan in the early sixties, and the basis for Liberty Life's early success, as I recall. Bruce Cameron has written far more than I want to on the subject here.)

An annuity is the product most of us will invest in to give us an income until the spring unravels in our mortal coil.

An annuity is the exact reverse of a life assurance policy. We all know what life assurance is: You pay a life assurer a small monthly amount, and on your death they pay your heirs one big amount. The amount you pay each month depends on:

• your health,
• your age,
• your gender,
• and (of course) how big a lumpsum you want on death.

(You either pay much more or get  much less if you are unhealthy, something we diabetics have to cope with.)

With life assurance, the longer you live the more the assurer wins.

An annuity is the opposite. You pay a big firm a lumpsum, and they pay you a small amount each month for the rest of your life. With an annuity, the shorter you live the more the assurer wins because they keep it all on your death.

What you get for your money is based on a few factors:

• your age (how long the income stream must last, so the younger you are the less you get each month);
• your gender (sadly, woman live longer than men so they get less each month);
• whether you want your income to grow each year by inflation or some other factor (in which case you get much less when you start out but it catches up later);
• whether you want the income stream to cover both you and your spouse (even less because two people almost always outlive one);
• the interest rates at the time you buy the annuity;
• and which company you buy the annuity from. 

There are a few more factors, but that’s enough for now. (The rates vary hugely, yet very few of us seem to check them all out.) This often means that the money never leaves the firm you started out with back before Noah had a beard.

If you are saving in a retirement annuity you are forced to buy an annuity when you retire, and it is widely sold to anybody who wants to get a monthly income into their dotage. You would think that it is simply a matter of taking your money from your savings account (most often a retirement annuity or two). Nope.

Once you have bought your annuity your money is locked away forever. Nothing is left, no matter when you die. You are at the mercy of the firm. This is not a problem unless the firm stumbles, as has happened recently in the UK with a big firm called Equitable Life. It's also not a problem unless the inflation rate gets too excited, as has happened in Zimbabwe recently.

And lastly, your income from your annuity is taxable. What SARS giveth as you get old, SARS taketh away as you get even older. Which reminds me, at this very early level I am ignoring tax issues. I will come back to those a bit later as we get much deeper into the project.

You know what your lumpsum is going to be at age 65 (we found that out here ), and you know what the buying power of that is today (that was here  as well). It’s quite easy to work out what kind of retirement income that will generate. Simply call your broker and ask for a quote on an annuity for yourself and your spouse, inflation linked. (And don’t get sidetracked by the questions - we’re looking for an approximate number.)

At the time of original writing (Oct 2008) I had three quotes from various SA firms, and if you’re in the UK it is pretty easy to get the current rates here. This particular page shows inflation linked UK rates, but you will instantly see how widely they vary - mainly based on your age, your spouses age, and whether you want the annuity to cover both of you. (I recommend the joint option if you want to stay married!)

Back to the SA rates for a moment, and then we will look at how much my R904,568 (from the previous page) will give me each month.

The three rates I got were all for myself and my woman, starting at age 65, for the rest of my life. They are:

• 10.276% for an annuity that will pay out exactly the same amount until we’re both gone, and is based on us both being 65 years of age when we buy it.
• 9.623% for exactly the same, but with my wife five years younger than me, and if we both die within 10 years the annuity will continue to be paid until the end of ten years.
• 4.448% for a monthly income that will increase by 7% each year (not quite inflation linked) and guarantee payout for at least ten years.

OK, so we have a few variables, and some complications. Bear with me because I had made the calculation easier (the calculator below) and I want to show you the kind of stuff that gets thrown at you. (A GREAT reason to have at least one second opinion from somebody who is not selling you anything!)