“PAY”CHEQUES AND “PLAY”CHEQUES

Enjoy a stress-free retirement – by taking LONGEVITY RISK off the table

People don’t really think about tomorrow as much as they should. We are always thinking in the
moment and remembering to put the seatbelt on in the car, because there is a risk of getting in an
accident, remembering to set the alarm when we leave home and all sorts of risks in life.

What is the number one risk for people as they approach retirement?

There is market return risk. There is withdrawal rate risk. There is deflation risk. There is also
the risk of inflation. There are other risks- you might need long term care, you might die. BUT -
there is only one Number One risk - longevity risk; that you could stay alive a long time – and
outlive your money. Longevity risk that is not just “another” risk, it’s a risk multiplier of all the
other risks. If you live to be age 65, and three years later you drop dead at 68, it won’t matter if
the market went down 3,000 points. It won’t matter if you were withdrawing 10 or 12% a year,
and it won’t matter if you forgot to save safely for long term care. You didn’t live long enough.
However, if you live to 85, 90 or 95, it is all those other risks that can wipe you out.

There are only a few financial solutions that take long term risk out of your financial future. A
lifetime income annuity that you would invest in from an insurance company can do it. A
deferred lifetime income annuity that companies would call longevity insurance; that could do it,
or a guaranteed income benefit rider from a fixed or variable annuity.

You have to have some form of an annuity in your portfolio because only an annuity can take
longevity risk off the table. Stocks can’t do it. Bonds can’t do it. Bank deposits can’t do it.
Managed money can’t do it. Only some form of an annuity; and here’s why. Only a life
insurance company can issue an annuity. Why? Only a life insurance company can issue a life
insurance policy to be on the other side of that risk.

The risk to the insurance company when you buy life insurance is that you die too soon and they
would have to pay out a big death claim. The risk to the insurance company when you buy a
lifetime income annuity is that you live a long time and they have to keep sending you money
every month/year. Because they are on both sides of that risk, they can neutralize longevity risks
for themselves and to their clients.

The rapid development of medical technology is going to allow people to live to be 100, 120 or
150 years of age. If you are an insurance company guaranteeing “paycheques for life” you are all
going to go out of business, right?” Wrong! They will be paying out a lot of lifetime income, but
they won’t be paying as many death claims because the insurance companies on both sides of
that risk are protected from people living too long or dying too soon because they are selling
products on both sides of these two risks.” They are the only industry that can take longevity risk
off the table.

If you are an analytical person - with some time on your hands – study the maths and science
presented by world-leading experts like Dr. David Babel, Dr. Moshe Milevsky of Toronto, Dr.
Menahem Yaari of Israel. All of the research clearly states that you’ve got to have some form of
an annuity in your portfolio to take that longevity risk off the table. It’s the number one risk
in retirement. This is not an opinion of some broker – it is hard fact. To argue against it is like
debating someone emotionally and suggesting that 1+1=3. It never does and never will.

If you don’t have a guaranteed income plan in place and let’s say that all your money is in the
market and you are taking out a certain percent every year, if the market goes the wrong way
there is no way your money will survive through that downturn. If you live a long time, will it?

This is what we refer to asthe order of returns or sequence of returns. When the market goes
down you have to take out more shares to liquidate and then those shares can never grow back.
For years people said four percent was the safe withdrawal rate. That has been thrown out the
window. Four percent is not safe anymore. Morningstar (Globally-recognized experts) now has it
as 2.8 percent. What does that mean? You need R1 million in a portfolio to draw out R28,000
per year. How many people are going to have that much money to pull this off?

In all of these withdrawal illustrations, they use “Monte Carlo” simulations. If you have an
existing broker and they have an income plan for you, read the small print. It will say something
like this. We have run 10,000 Monte Carlo simulations and there is a 70% chance your money
will last you to age 90. The brokers all use age 90 in their Monte Carlo simulations. Well, age 90
fails 63% of the time. If people do live longer – let’s say people do start living to 100, 110, 120,
130 – every one of those Monte Carlo simulations will fail. Not a single one of them could last to
120. That is where you are going to see big problems if people continue to live longer and they
have been in these portfolios. They are going to run out of money.

Fortunately,you only need a portion of your portfolio to do overcome these risks. Let’s look at a
fun example to explain this:

A family from Cape Town have never seen Namibia before – the desert, Luderitz, Walvis Bay
and all the game in between They want to see wildebeest, gemsbok, the Namaqua flowers on the
way and watch whales frolick off Walvis Bay’s harbor. So they head off in their fancy 2019
Landrover Discovery with 8-way air-conditioning. They’re driving through the northern Cape,
across the border and into the desert saying “Oh, look at that, we haven’t seen that. Oh, look at
that.” It’s 38 degrees outside the vehicle but they’re just enjoying the scenery. As the day goes
on, all of the sudden somebody notices that the tank is on “E,” and the next town is 200 km
away. The windows come down, the air conditioner goes off, the heat of the day pours in and
now they start arguing. How fast should we drive? They are not viewing anything outside
anymore. They are just arguing back and forth.
People think running out of money is the day you run out. Incorrect ! It is all those years in
retirement when you know you are going to run out. You just don’t know when and you are
staring at that gas gauge, your bank account or your investment account and it keeps going down,
down, down, and now you are fighting and arguing; not even enjoying retirement. That is why
you have to have a lifetime income annuity. It is like having a quarter of a tank of gas,
guaranteeing that you will never run out of gas in the desert. Apportion your portfolio to make
sure that your basic expenses are covered in retirement.

And only THEN can you apportion the remainder to funding your “playcheque” by optimizing
your investment portfolio and exposing your remaining leftover capital to market risk. The
“playcheque” pays for that 50th wedding anniversary trip for the whole family including your
grandkids. If you’ve been having a great year on the market, everyone gets to go to Disneyland
for 10 days with the Fast Pass in hand so they don’t have to stand in long lines waiting for the
rides. If the market has been just “okay”, maybe it’s a week at Umhlanga buying up other
people’s timeshare for accommodation. If the share market is in a slump, then you’re left with a
bring-and-braai in your back yard (bring your own dop).

Hopefully, you will head the advice in this article and act sensibly by taking precautions today to
secure a better tomorrow!