After decades of hard work and careful financial management, most of us look forward to a comfortable retirement – but is your portfolio structured in the right way to make this a reality? Let’s explore the elements of a balanced retirement portfolio and find out whether we are relying too heavily on Retirement Annuities.
Retirement in the 21st century
With life expectancy rising each year in developed populations, retired people are facing a new reality that didn’t apply to previous generations – the average working person today may live for 20 to 25 years beyond retirement age.
Greater longevity is good news overall, especially for those who enjoy good health well into their retirement. A longer lifespan also means that our retirement portfolios will need to provide us with income for a longer period of time – but how can we achieve this?
Balancing growth against risk – are RAs the solution?
Traditional retirement portfolios placed a big emphasis on low-risk, stable investment vehicles like pension funds, retirement annuities, cash, bonds, and perhaps rental properties. These vehicles provided adequate income for retired people, with a horizon of 10 to 15 years.
Today’s retired individual faces a different prospect – in order to live comfortably for up to 25 years on their retirement capital, the current generation will need to opt for higher-yielding investments, taking the risk of these vehicles into consideration.
Retirement Annuities (RAs) offer an income from the time of retirement onwards, with two types of policy available to investors: Living Annuities allow any capital left in the annuity to be inherited by the policyholder’s dependants, while Guaranteed Annuities provide a guaranteed return with one condition – the capital is forfeited when the policyholder passes away, and is reinvested in the retirement fund.
RAs offer the security of a low-risk income during retirement, but before you place the bulk of your capital in these vehicles, here are some considerations:
- The benefit of leaving the capital in your Living Annuity to your dependants comes at a cost – you will receive lower returns during the course of your retirement than you would from a Guaranteed Annuity.
- The return on any RA probably won’t be sufficient to produce inflation-beating income for up to 25 years. A modern pension portfolio must include a mix of RAs, equities, cash, and property investments to ensure a comfortable retirement.