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Living Annuities

Published

2009

Mon

05

Oct

 

Retirement can be a bewildering process. It is not only a time of adjustment in your working career; it is also a time to make financial decisions that will impact on your lifestyle for the rest of your life.

Mike RonaldKnowing whether you have enough money set aside to support your desired lifestyle, estimating what your future living costs will be and making investment choices for your savings are decisions that can weigh heavily on any retiree. Of critical importance is the need to invest savings in such a way that you will have a reasonable lifestyle for your retirement years.

There are many investment choices to help you achieve this, one of which is a living annuity. This is a policy issued by a life company whereby the savings from your retirement funds are used to pay an annuity in such a way that the capital is protected as much as possible. Guidelines have been created to assist the retiree to set the amount to be drawn every month so that the capital of the investment lasts over the life time of the retiree.
 
What can be disastrous for a living annuity is when an investor draws too much income and hence erodes the capital base of the investment to such a position where it is no longer able to provide a living income. Often retirees rely on the continued increase in the value of their investment to make up any shortfall between annuity drawn and income earned. While this works when the market is rising, it can be dangerous when the market suffers losses. 
 
Research conducted by Marriott has demonstrated that drawing more annuity than income earned during periods of market weakness,  particularly in the early stages of a living annuity, can lead to so much capital being reduced both by income drawn and market weakness that the capital base is unable to sustain a reasonable standard of living.
 
Marriott has created an approach to living annuities based on the principle of matching the income drawn from your living annuity to the income that the investments produce. This methodology strongly recommends that the capital of the investment is never touched until the retiree reaches a stage in their retirement years when it is safe to do so.
 
To assist retirees and their financial advisors in this process, Marriott has created an online Living Annuity Tool which enables the retiree to implement this methodology. It not only assists the retiree to set their annuity at a level which ensures that it matches the income from the underlying investments; it also provides an estimate of future income and annuities and hence assists the retiree in planning future years.
 
This tool is able to give an idea of what the future might hold as a result of Marriott’s Income Focused Investment style. A benefit of this is the generation of predictable and growing income from the funds into which the retiree would invest. This reliability in income is a hallmark of Marriott and sets their investment style apart from other asset managers. It also provides the retiree with high levels of reliable and growing income as well as above-average risk-adjusted returns, enabling the retiree to reduce anxieties over investment decisions.
 
Marriott offers three funds together with this web tool. Each fund offers a particular level of reliable income, an expected growth rate of that income and the expectation that, over time, the value of the investment will grow at the same rate as the growth in income.
 
The Marriott High Income FOF offers a high yield (currently 9.2%) and an expected income growth of around 2% per annum. The Marriott Prudential Income FOF is a prudentially managed fund suitable for inclusion in products that require a Regulation 28 portfolio. This fund currently offers a yield of 5% and an expected growth in income of 6%. The Marriott Worldwide FOF offers exposure to first world capital markets as well as local equities.  It has a current yield of 3.5% and an expected income growth of 8%.
 
Using Marriott’s matching methodology in managing living annuities provides the retiree with the confidence to budget for a lifestyle now and into the future and the security of knowing that the capital base of their investment will survive during their retirement years.
 
Source: Shirley Williams Communications
 
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