Solving The Riddle Podcast
Financial decisions shouldn't feel like a mystery. Solving the Riddle simplifies the world of money, providing the tools and topical advice you need to master your personal finances and secure your long-term wealth.
Solving The Riddle Podcast
Cracking the Retirement Code & The Just Retirement Survey Results
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Cracking the Retirement Code: Blended Solutions & The Just Insights Survey
Hosts: Alec Riddle & Andrew Whitewood
Special Guest: Bjorn Ladewig ,Actuary and Retirement Income Specialist at Just
Are you on track for a secure retirement, or are you navigating a hidden shortfall?
In this eye-opening episode of Solving the Riddle, hosts Andrew Whitewood and Alec Riddle dive deep into the sobering realities of the South African retirement landscape. With the latest Just Retirement Insights Survey hitting the streets, the data reveals a staggering 48% gap between what the typical retiree expects to need and what they actually have saved. Worse yet, stats show that 94% of South Africans cannot afford to retire comfortably, leaving many to rely on family and children to make ends meet.
To help unpack these financial riddles, Andrew and Alec welcome actuary and retirement income specialist Bjorn Ladewig. Together, they confront the traditional, binary choice between living annuities and life annuities to introduce the "10th wonder of the world"—blended annuity solutions.
In this episode, you’ll discover:
• The Reality Check: Why drawing 7%+ from a standard living annuity could cause retirees to hit a brick wall in just 13 years.
• The Power of Pooling: How life annuities offer guaranteed income for life, insulated from market volatility.
• The Blended Blueprint: How combining the flexibility of a living annuity with the security of a life annuity maximizes sustainable drawdown rates—giving you the best of both worlds.
• Defeating the Risks: Why protecting your portfolio against sequence of return risk early in retirement is critical to longevity of capital.
You can download Just Retirement insights on this link: http://Retirementinsights.co.za
Whether you are a youngster who needs to start saving earlier, a professional phasing into retirement via consulting, or an adult looking out for elderly parents, this episode provides the practical frameworks needed to secure financial independence and protect your dignity.
Tune in to learn how a smart, blended strategy can potentially double the runway of your retirement journey!
Don't forget to subscribe, leave a comment, and share this episode with anyone looking to build lasting wealth.
Follow our personal accounts:@alecriddle @andrewwhitewood THE INFORMATION SHARED IN THIS PODCAST IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL ADVICE IN ANY WAY OR FORM. IT IS IMPORTANT TO CONSULT A FINANCIAL PLANNER TO RECEIVE FINANCIAL ADVICE BEFORE ACTING ON ANY INFORMATION SHARED.
Hey everyone, welcome to Open the Riddle, the impact of financial health shaping your future. I'm a good one to do it. And together with Alec Riddle, we explore the ideas, behaviors, and strategies to help people make smart financial decisions and wealth.
SPEAKER_00Welcome back to the Solving the Riddle podcast and what an exciting episode we have for you today. This week, the Just Retirement Insights survey is dropping, and we already have sight of some of the amazing stats. So if you are about to retire or in retirement, or you are an adult with elderly parents, you really need to follow us through on this episode. We've got a specialist, uh Bjorn Loddewich, who's going to be joining us to talk about the survey. But just very quickly, Andrew, um, out of the survey came that a typical retiree has about a 48% shortfall going into retirement. It's quite a staggering statistic.
SPEAKER_01Yeah, Alec, and welcome back, everyone. It's we know the challenges that retirees are facing out there. Um, we are facing a retirement crisis in South Africa. I think some other stats that we picked up outside of the survey are that 94% of South Africans cannot afford to retire, Alec. And I think the big challenge that a lot of South Africans are naturally facing is that they are leaving their retirement decisions too late. And I think the key thing that you and I are focusing on in this podcast is also the youngsters out there, the youth, the 20-year-olds, the 25-year-olds, they need to start saving a whole lot earlier, Alec.
SPEAKER_00The other thing is what came through in the survey is that, and I think there were about 450 people interviewed. It's quite a big sample size. And what came through is that they are saying if they run out of money, they will rely on children, family, and that's about 50%. So if you do not want to have to knock on your children's door, you really need to be listening to what Bjorn is going to be sharing with us a little bit later. And as I mentioned, if you're Andrew's age and you've got an elderly parent who perhaps doesn't have enough, make sure that you listen because there are ways to change the retirement runway. You can prolong the length of a retirement journey by utilizing what we are going to be speaking about in this podcast. And um, of course, in the in the past, you used to have a pension fund, you know, the your your parents or your grandparents were a pension fund, they were would have an income for life with escalation. Um that has fallen by the wayside. We now find 85 to 90 percent of people going into retirement are using living energy great products, but they rely a lot on the market. And um we want to talk about like perhaps a blend of the two.
SPEAKER_01Totally agree, Alec. And I think the whole retirement sphere or space is changing, right? We've had many conversations around this. A lot of people focus on that line in the stand, age 60, for example, or age 65, right? And then they flip into retirement, and then there's challenges, obviously, from an emotional and psychological point of view. But what we are seeing with a lot of people now building up to retirement, obviously, employment has changed uh dramatically out there. People aren't working for the same employer for, for example, for 40, 50 years, etc. And like you say, then they retire um via a defined benefit scheme. Um, a lot of people are now in defined contribution schemes. And the thing is, they are phasing into retirement, Alec. They are no longer just drawing a line, like I said a little bit earlier at age 60 or 65. They are working maybe from 65 to 75, um, doing some consultancy work, etc. And like you rightly said now, you you've got a living annuity, you've got a life annuity, we could unpack a blended annuity, but you've also got to take into consideration other income streams, Alec. So, in my world, and we share very similar views, the retirement sphere is changing rapidly, and you've got to start rethinking sooner rather than later how you implement your retirement planning framework, your decision-making process, and your financial plan at the end of the day.
SPEAKER_00And retirement, of course, is not just about income and capital, it's about dignity, it's about independence, it's about legacy. And I always say to my clients the greatest legacy that you can leave to your children is not to have to knock on their door. And that is what we're gonna be talking about. So we're gonna break for a moment while we welcome Bjorn on set and uh let's get the specialist in as soon as possible and uh bring you some very insightful insights from uh from the just retirement uh survey.
SPEAKER_01Hey Bjorn, thank you very much for coming on to today's show. Starting point, I think we'd like just to for you to introduce yourself to everyone. I know obviously um I met you about seven years ago in Cape Town. I know that you live in Malkboss, but I think for our viewers, our subscribers, and everyone that obviously listens to the podcast, please just a little bit of personal background, just to warm everyone up.
SPEAKER_03Okay, thanks guys, and thanks for having me here today. It's awesome. Uh, my name is Bjorn. I work in a company called Just, and we are retirement income specialists. Uh but enough about that. Um, I live in Melkbooks, as Andrew says, uh, and I really love the ocean. Play a bit of paddle, have two lovely kids, and uh just live life happily and have a passion to make sure people have enough income in retirement.
SPEAKER_01So you say you play a bit of paddle. I think that's a bit of an understatement.
SPEAKER_00I've heard you're pretty good at this game.
SPEAKER_03I try, I really enjoy it, guys. It's something that you can try, but make sure you stretch. Don't break those um Achilles, um, but but give it a go. It's good fun, and I'm sure it's gonna keep me living long.
SPEAKER_01And beyond just a little bit of background, how long have you been in the industry for? Um, what's your background from an educational point of view? I think you're an actuary, I might be wrong. I don't know if that's a good or a bad thing. Yeah, I was waiting if someone's gonna drop that today.
SPEAKER_03Uh yes, I'm an actuary. Uh, I started in 2000, so nice, nice round number. Um, been around the world, uh, South Africa, Germany, Switzerland. Uh have actually been very involved in longevity solutions throughout insuring them, reinsuring them, structuring, pricing them, and lately selling them. So just having a lot of fun with that.
SPEAKER_01Awesome. And Bjorn, you would have heard a little bit earlier, Alec and I were speaking about living annuities, life annuities. I mentioned specifically blended uh annuities or solutions. I think that's a good starting point. You've spoken about longevity solutions, so that might be quite a complicated term. So let's just start there. What do you mean about longevity solutions? And then I think
Life annuity vs Living annuity
SPEAKER_01what we need to do is unpack a living annuity, a life annuity, and then move on to the blended annuity.
SPEAKER_03Absolutely, and that's where the rubber hits the road, right? We we have these lofty words, but in the end it's about what really matters and what clients need. And uh let's talk a little bit about what a life and the living annuity is. Those are two products in in South Africa that when you come out of your working um career and you retire, you have to pick one of these two products. A life annuity is a very simple product, um, it turns your savings into an income for life, it's guaranteed. Um, there are different types, but basically it won't stop paying and it's generally not affected by market conditions. The other one is called a living annuity, great product, flexible. I always explain it as a bit of a bank account. Um, not that you would only invest in cash, but it's a bank account from which you then choose how much to draw down. Um, that varies from two and a half to 17.5%, is what is allowed. And that then gives you great flexibility. And on the day you die, you leave money to your beneficiaries. But of course, in that, because it doesn't have a guaranteed component, you have to plan carefully and make sure that you draw down at levels that are sustainable. So those are the two products.
SPEAKER_00So
Safe drawdown rates
SPEAKER_00let's touch on the safe drawdown rates. So we've heard and very often coming out of America is the 4% rule, um, which uh you you want to unpack because I know you talk about the 25 and the 300 number, but um I just want to touch on drawdown rates and we uh in in retirements in South Africa. That generally in the living nerdy space, retirees are drawing out seven, seven plus percent per annum. The problem with that, if you're going to get an increase to counterinflation each year, that income will only last for 13 years. So retirees are gonna hit a brick wall. When you say that's the average, it means that 50% of retirees are in trouble and they don't even know about it. So if you just want to explain, you know, of trying to get down to five or four percent.
SPEAKER_03Yeah. And that's really, really important to think through those things. Um so we spoke about the save drawdown rate. Um generally people would say it's between four and five percent. Actually, that does go up the older you get. But let's say you're around retirement age 60-65, are you looking at four or five percent? Well, what that means in reality is that you would have had to save about 20 to 25 times the annual income you want to take home. And that's quite a big number. It's a massive number if you want to.
SPEAKER_00So let's just uh pause for a moment. So if you need 50,000 rand a month gross to, for example, get 40,000 net tax after tax. 50,000 times 12 is 600 times 20 to 25 means you need 12 to 15 million rand, and you haven't even got your lifestyle goals factored in.
SPEAKER_03Exactly. And Alec, that actually is precisely the number you mentioned in another podcast. Uh so go listen to that, folks. The actuary coming out of you there, Bjorn. No, the the the I'm glad somebody's listening to our podcast. There's lots of people listening.
SPEAKER_01I think there's lots of people listening.
SPEAKER_03And and that's a you uh back to another number you mentioned just now, the 48%. So on that, um, and the survey we did, um, so just quickly on that, this just retirement insights. Uh, that's the seventh one uh we've done. And yes, whereas 446 people around South Africa that we that we interviewed. We try and get a good quota of different locations, race, gender, so there's diversity, beyond. Exactly. So make it as representative as possible. And what that said is that people expected in an income of on average 10,000, let's just make it round, 10,000 per month. Um, for that, if you do the math, um you would need to have three million in the bank to do that. Uh, yet on average they have 1.6 million, and that's that for the eight percent shortfall. Um so and and and I think that's a big part of why we're here today, to to take that gap between expectation and reality and see what tools, what information we can provide people, but to just think that through and understand, raise awareness, but then hopefully we can also help with a few solutions, a few ideas of how you can solve that.
SPEAKER_00Yeah. And if I can just mention, I'm not gonna unpack it now, but towards the end of the episode, we'll talk about a real life example where we've taken a client who was on that pathway of 13 years, and we managed to get the the retirement journey or expectation of the plan to last for more than double that. And that's quite significant. So if you want to find out how you can prolong your retirement, make sure you know you you follow through. Uh, we first want to unpack a few other things. Andrew, um, you want to come in there?
SPEAKER_01Yeah, I think Alec, the key thing for me is maybe let's just unpack that journey now. That's so we've touched on living high-level life and blended. So the thing where I get really excited, I think a couple of years ago, obviously, I engaged with you, Bjorn, in Cape Town. Alec and I were chatting uh virtually about this blended solution, right? So Alec referred to a little bit earlier in the program with regards to let's call it sandwich generation, right? So we've got these people that are approaching retirement or are in retirement, are facing challenges, okay? But then we've got this younger generation, like Alex said, someone my age, 40 years old, call it a little bit younger, a little bit older, also got a young family, okay. But there is a solution out there, and like Alex said, we're gonna give a practical example or two. I
Blended solution: where life annuity meets living annuity
SPEAKER_01think from my side, Bjorn, I would love for you just to unpack that blended solution. So, how we bring that living annuity and life annuity together.
SPEAKER_03Fantastic. And I mentioned what a life and a living annuity, uh, what both of those are. And for long we've seen that it was a binary choice. You had to choose the one or the other. And then this tenth wonder came around. And if you're wondering why 10, again, go listen to the other podcast. Exactly. Wonder of the world at some point. Oh, and it's probably like many of the other wonders, they've been around, or someone just had to discover them or tag them. Um, but what that is about is that really why limit yourself to choosing the one or the other, why not combine the two? And why that is so pertinent is I mentioned the safe drawdown that you have you can only or should try and draw down four or five percent from a living annuity. Life annuity rates or the income you can get from those are higher. It relies on the pooling concept, um, an insurance concept, where those who die earlier than expected subsidize those who live longer than expected. So, on average, the pool is okay, and that literally just means you get a higher income rate than this safe drawdown rate where you are self-insured. And because of that, um that stretches you more, but you may not want to or have to go fully into a life annuity. But combining the two, you then increase the combined income rate that you can sustainably take, and Bob's your uncle, you're uh and you can dial that how you want. Anything between zero and hundred percent, and that has really just opened up um many doors in South Africa. Yes, it's combining two things that maybe up until now you've thought about the one or the other, so you have to think through that um a bit, but it's not that complex. Um, and it's it's coming. I mean, there's a lot of people who we've seen have done it with success already, and there are more people going into it's in my mind, it's the best of both worlds.
SPEAKER_01And when Alec, you and I sat a couple of years ago and sat down and looked at the solution. We'll be honest, in that we didn't really obviously we knew of life annuities, right? But it made us think of life annuities and living annuities in a totally different way, right? And like you said, uh Alec, we're gonna speak about a practical example. But I think a lot of people almost have tunnel vision, okay? They are stuck in their ways. And I'm speaking about us as financial planners, right? Alec, I'm not pointing the finger at clients or at Bjorn. Um the default, for example, living annuity. Ah, if you're drawing 6%, you might survive 7%. But maybe, Alec, just to throw you um uh under the spotlight, is from a I don't want to go into sequence of return risk. We have touched on it a lot of detail, but we speak about a safe drawdown of call four or five percent, but you mentioned seven percent. Maybe just highlight the pressure that that puts on the financial plan and longevity of capital if you get off to a bad start. And for example, you've got a drawdown of six percent.
SPEAKER_00Yeah, well, the drawdown rate, the higher drawdown rate can hurt a portfolio massively when you get a bad sequence of returns. So, for example, let's use um the global financial crisis as an example. If the markets tumbled 30%, let's say you've got a 10 million rand living unity and you are drawing, let's say, 6%, which is 50,000 rand a month, and uh suddenly the markets drop. And yes, the equity markets might have dropped by 30 percent, a balanced portfolio typically dropped about 10 percent. Well, you had 10 million, you had to draw 600,000, but your 10 million also dropped 10 percent. So at the end of that year, you've got 840,000 Rand. You can never recover from that. So sequence of return risk protection is very important when you construct a portfolio, I believe. And one of the best ways of countering this is incorporating a life anuity. And the nice thing about this, and you mentioned in the past, you had to make a choice at retirement, it's one or the other. The beauty is now you can have this blend, and you don't have to make all the choice at once. So I would say caution, beware of going 100% into a life inerty, understand, because you want flexibility. So a blend would be great. And you if you've gone into a life inerity, you can never come out. Okay? But if you're a living inerti, you can transition 10%, 20%, 50% into a life inerty. And practically, uh how how is that happening? Do you see that in in just absolutely.
SPEAKER_03Um, and uh just the other day we we had a look at um these what we call tranches, so tranche sizes. And the behavior is interesting. Um, many people do go in once of they they know that um let's say they they need a 50%, we call it a blend. So they need a 50% blend, they go into it. But many others also transition into it. They they dip their toes, maybe, or they have what we call a gliding path um strategy, so they they go into that. Maybe just to touch on this um the sequence of return risk or or that that worry. And that came up in the in the survey again that um only 8% of people we interviewed said that they can afford to lose 10% or more in their in their portfolio. And I understand that. So uh people don't have that capacity for loss. And back to the drawdown rates or the combination, when you reduce your drawdown rates, you you are just not selling as much in the low price environment as you as you need to. And certainly the combination then of the two, this life annuity continues to feed an income, and you can draw that, and you don't need to sell your assets, and that's why the combination, but certainly also just the having a low drawdown rate, just gives you a lot uh more capacity or ability or and resilience to to sail through that storm, gents.
SPEAKER_01As you everyone can see, we like we're so passionate. Um, I think we could go on for hours and hours. I think the key thing from
Longevity
SPEAKER_01my side is what I'd like to unpack now is also long-living, longevity. Okay, and I think once again, Bjorn, uh, when Alec and I have been dealing with you, you guys do a uh a massive amount of research. Um, so I'd love for you to unpack your learnings and research findings from a longevity point of view. Because I think a lot of people out there think like, uh, 80, 82, 83, 85 is a great number. But based on the research and findings out of just that number is totally different.
SPEAKER_03Absolutely. And and what we find are, and it's probably three interesting things, and it starts with on average people saying that they are above average health, which I find is fantastic. The the optimism around that is is great, and I uh I really I really do value that. Yet when we ask them what you think your life expectancy is, they typically underestimate that by five to ten years. Um let's add a little bit of numbers to it. Now, life expectancy varies by how old you are now, but let's say from age 65, your total life expectancy for the kind of people we work with are in South Africa 82 for males and 87 for for females. And then interestingly, both um males and females guessed at around 77. So males underestimate by five years and females by by 10 years. So those are the two things already. So they think they're quite healthy, yet they underestimate life expectancy. But the third thing I find more telling, and and maybe that goes into a little bit of the stats around it. We we talk a lot about life expectancy, but we forget that that's literally um the point at which there's a 50% chance of living beyond that age. And that's the thing that you need to really consider carefully when you do your financial planning around retirement. So you can't uh work just to that point and expect that you're gonna keep over.
SPEAKER_00It's almost like you've got two boxes. Which box are you in? The one that's gonna exit prior to 82 or the one that's gonna exit after 82. And if you're in the one after 82, you need to make sure that you've got enough capital or income.
SPEAKER_03Absolutely, and that's why generally they would say the rule of thumb is aim for age 95 when you're a male and 100 for a female. And the reason, by the way, they say that is that generally has around a 10% probability of living up to that point. And now we're talking about a plan that that's sustainable, that makes sense.
SPEAKER_00Yeah, and the other big plus is with the life anuity and the way, and you being an actuary, you would know, um, the actuaries actually basically work it on the mortality rate. So you're getting a rate uh where if you check out at mortality age, you've actually probably um got your full value out of the life annuity. If you live longer, it's like you've got this. Bonus.
SPEAKER_03Absolutely. Yeah. And it's exactly that. We uh when we refer to it, we talk about survival credits, and it's really just firstly just by being in the pool, you already get that. But it especially when you live beyond life expectancy, which has a 50% probability, you're truly getting that return kicker, a very valuable thing in retirement.
SPEAKER_00What we also find, and this is interesting, though we're going off at a slightly different tangent now. Life annuities don't only enhance the longevity of plan, they can help to create more wealth. Because you've got this lower drawdown rate, and we've done a lot of work on this, Andrew, and I remember when we were doing a lot of research, you know, I was um, you know, looking after your mom's portfolio and whatever, and I said, you know, and your mom's really provided well, you know, uh for her retirement, or your or your your late dad certainly provided very well for you know for for your mom. Um and I said, Well, why don't you consider a portion into a life annuity, reduce the drawdown on a living annuity, and there'll be more capital uh later on in life. So you can actually use it to actually, you know, enhance the the so you can actually leave two great legacies. One, not to have to knock on the children's door, and two, but if you do live longer, create more wealth to leave behind for the kids because you take some of the capital to buy life in your tea, but on the low drawdown rate, it helps accelerate the growth of that capital.
SPEAKER_03Absolutely. And and that's a common behavioral aspect we sit with that we all worry more about dying today and tomorrow. Now I understand that, and I think um COVID has probably heightened that anxiety. Yet if you think through what you'd expect, how long you'd expect to live, there are many papers out there that that prove that by actually combining the two, you extend even the capital legacy, which is counterintuitive. And let me just um tell every explain to everyone why we say that within the life annuity, as I mentioned, is a pool, but it does mean that when you die, the income just stops. You don't get you can add. Unless you've got 100% spouse income, those types of things. Please we are we've got a couple zero. Can you guys please use the buzzer next? Umless you add benefits. Uh we've been talking about this too much, guys. Um but absolutely, and that's that's I think do you think the counterintuitive thing? Um, but because we so we so badly want to leave money for the kids, uh, we focus on that element too much. And then again, but what practically happens, so many are then dependent on exactly the ones who they wanted to leave money to, and that's what we want to avoid.
SPEAKER_01Just to add to that point, sorry, and this just goes back to the whole opening couple of minutes of today's podcast. People, or should I say once again, financial planners have tunnel vision, right? And you've you've got to broaden your horizons, you've got to approach this sort of conundrum differently. And the way Alec and I positioned a life annuity from a wealth generation point of view, uh Bjorn, I'd like to hear your opinion um in a couple of seconds, is that it's a totally separate asset class, right? And rightly, like Alec, you brought up now when my mom bought a life annuity with a percentage of her living annuity, her starting drawdown at the age of 72 was about 9% with a 6% escalation and a capital guarantee. Um, so people are so focused a lot of the time on legacy, but there are certain scenarios when tying up a certain amount of money in an inflexible solution, for example, like a life annuity, is actually potentially going to create more of a legacy for AirSbion.
SPEAKER_03Absolutely, and that's that tenth one that we were talking about. And and it is the way to think about it, is that it is, yes, a slightly different type of asset class, but it is just a uh asset class which, particularly for drawdown scenarios, decumulation, uh is totally worthwhile considering. And yes, it that it can actually create um wealth. And always uh when in discussions like this, there's even sometimes reverse scenarios that if you think through, and I mentioned you have to draw down two and a half percent um minimum. Um, I have seen people put exactly what's needed to pay that into a life annuity, and then ironically, you know, they then only draw down two and a half percent, so they're in that lucky position, but then they essentially have guaranteed the capital legacy because that income that they have to take is now guaranteed, and the rest then, counterintuitively, is literally guaranteed capital legacy. So there you go.
SPEAKER_00What I also found listening to that episode you were on Asset TV, was it Sharon, the lady? Yes, yes. And Sharon used an example of taking a certain amount of capital to secure income to cover the medical aid. And um obviously if the one passes, well then you only need half of that amount, so you could have a a reduced um reduced pension, which increases the rate. Absolutely pretty much. And I'm gonna come back to that example I wanted to mention earlier, and then you can uh perhaps come in. But something I've also learned in my 25 years in this uh in this profession is that when people are young uh approaching retirement, they're all focusing on, well, what if I die tomorrow? I need the capital to go to my kids. Ten to fifteen years later, the conversation changes, and the clients start to say, Well, I need to be sure I'm gonna have income that's gonna last longer than I'm gonna live. I don't want to have to knock on the children's door. And this is where this example came in now. So, and this is just one of probably 40 or 50 cases that I've actually done or where I've transitioned uh families into a blended product. And this client was 72, his wife was 71, and uh his drawdown was getting too high. It was at about 7%. So, you know, previously he wasn't worried, now he started to get worried because you know what happens if I live beyond 80 or 85, and so forth. And then I said, Well, I need to introduce this to you. So he needed, sorry, it was seven and a half percent was the drawdown. So if he needs seven and a half percent, and we can get a life annuity, which I managed to get of ten percent, the rate was ten percent with a hundred percent spouse income. Right? So I said, let's take half of the money, let's say it's a ten million rand. We take so ten million rand we'll give you seven hundred and fifty thousand for the year. Let's take five million, we get a rate of ten percent guaranteed with escalations and guaranteed for both you and your wife. That means on five million you're gonna get five hundred thousand. Now you only need two hundred and fifty thousand from the other five million. We leave that in the traditional living unity, the drawdown will be now as low as five percent. Now, the one half of capital is gonna be guaranteed for life even if you live to 150. The living nearity, 5% drawdown, is gonna get you beyond 30 years. We've more than doubled the duration of that plan. That gentleman had tears running down his eyes in my office. It was just astonishing. And um and we've managed to do that to help people whose drawdown is too high, perhaps it it and it's not through lack of trying. It was just there was a lack of capital adequacy at retant. And the it almost they forced into the situation. And if the average drawdown in South Africa is seven, seven and a half percent, it means that 50% of retirees are in the same circumstance as this gentleman was. And 50% of those retirement plans can potentially, maybe not all of them, but many of them can be. You know, I remember there's a slide you've got of the danger zone, the risky zone, and the safe zone. You want to touch on that a little bit?
SPEAKER_03Yeah, so let's talk through that and and back to your example. And what's so beautiful about that is that they didn't have to change how much they're drawing down. Okay, they're still drawing down the 7.5%. But the plan now is a lot more sustainable. And if they didn't do that, uh we spoke about safe drawdown rates, they would have probably had to go down to 5% drawdown just to make sure that remains sustainable. And I don't know how many how much salary knocks. I don't know how much salary knocks you guys can afford, but uh that's that's a tough pull to swallow. But then if you look at the stats in reality, um what we do see, and we've I think we've done about 40,000 living in Newtons by now, where we go and map them um by drawdown rate and age, and then we say, well, how many are in the safe zone? So they are drawing down below at or below the safe drawdown rates, and and we found that only 33% are in that zone of people. By money, it's a bit more because generally the wealthier, the lower the drawdown rate. Um, and then on the rest, and we've we've split that into two other zones. The one is called the risky zone, it's when they're drawing down between the safe drawdown rate and what we could get from a life annuity, so the 10% that Alec mentioned in his example, and then in a way, boringly, a third sits in there and a third in that top zone, which we call the danger zone, because they're drawing down rates even above life annuity rates.
SPEAKER_00So even a life annuity would not be able to put them in the same position. Absolutely. They could secure income for life, but they might have to take a salary cut.
SPEAKER_03Absolutely. And that's and we're not gonna do top gun themes today, um, but that highway to the danger zone there can be a dangerous highway. And what happens there is if you're in that risky zone, so let's take again your example. If if they said no, we'll we'll try luck, you know, the happy go lucky is South African attitude, um, that may cause a slide, you know, that every year the drawdown rate increases and increases, and then you may end up in the danger zone. And then either you'd have to fully annuitize, so buy a life annuity for everything, but at the same time, you may then even have to reduce the the income you get because you heard now you're you're even above a life annuity rate. And I think that's the that's the thing that that should um should go through in planning and thinking, okay, but what are my options today?
SPEAKER_00Can I just also just add, you know, if you think out of the box, there's so many opportunities. So I want to give you an example of a couple where the wife has got a certain amount of assets uh from the sale of a property, and it's enough to sustain her life. Okay. The husband has a million rand life policy and quite an expensive premium. And I said lend him or donate a million rand to your husband. He's much older, will take a life annuity, we've got a rate of 18.5% so that uh you're getting an income of 185,000 or 15,000 rand a month, you're easily paying for the premium, you've got 10%, 10,000 boost to your lifestyle, and when he dies, the million rand comes back into your plan from the life cover. So you can there's many ways you can use these things. Fantastic.
SPEAKER_01Yeah, and Alec, just to adding to that point, and we've also once again with Bjorn had many conversations with regards to timing that shift, right, into a life annuity. Okay, and for example, now, and we don't want to go into the technicalities of bond yields, etc., which underpin a life annuity, but I think it's very, very important for our listeners, our subscribers, our clients out there to understand, okay, it's not necessarily about timing that decision perfectly, right? Because, for example, markets have run very hard or aggressively of late, and what I mean is we've experienced substantial inflation beating returns, Alec. So uh values in living annuities are up significantly, significantly, sorry, even after uh monthly or annual drawdowns, right? So now if we have to sit with a client, for example, Alec and say, let's purchase into a life annuity or contribute and transfer 20 or 25 percent of your living annuity to a life annuity, people might like get a bit of a fright with regards to what their starting drawdown is. So I don't want to give too much away from uh from your explanation, Bjorn. But do you mind just unpacking that approach? Because once again, I think it's very much a mindset thing from a financial planning point of view.
SPEAKER_03Absolutely, and that is a behavioral thing we're seeing at the moment. So in South Africa, markets have generally been doing well in the last um three years, and we're very happy about that. Um, what we do find, and and you mentioned yields, so uh generally for these life annuities, we invest into bonds to make sure we get that sustainable income as well to pay to the policy holders. And that means we are quite exposed for that calculation to bond yields. And what generally happens though, if markets are doing well, yields are lower. If you were to only look at one side of the coin, so that that conversion rate, so let's say for your million rand that you can get a 7% income rate, if you only look at that and forget, but your million rand has actually it used to be 600,000 and has now grown to a million, then you you'd forget that your effective income that you can buy now would actually be higher. And that's why we've we've started with something that we banking bank the rally or um or you know, just thinking through that effective income calculation. Um otherwise you are only gonna look at that conversion rate and maybe then make the wrong decision. But yeah, that's what we're seeing at the moment. And remember the converse would apply to you. So if you if you're only waiting for that yield or that conversion, that annuity rate to go up, it will likely happen when markets crash. And then you may ironically actually be able to effectively buy less income because the fund values may have dropped more than the annuity rate would have increased. So it's back to you know uh going to your trusted advisor who's got these things or asking the questions and making sure that you're making the right decisions.
SPEAKER_00Yeah, so I think you know, we've we've we've covered a lot, we love to cover a lot more. Um, what we encourage you to do is to drop a comment, um, reach out to us. We can send you more information, we can put you in front of a professional uh planner who has experience of uh this type of product, this type of uh retirement planning. But Bjorn, I just want to say a mighty big thank you to you. We really do appreciate you. You know, you are one of the leaders in this field. Um, we've learned so much from you over the past few years, and our clients have benefited greatly as a result of that. So thanks a lot for coming to join us.
SPEAKER_02Thanks, guys, and keep up the good work. Um, lots of education and good information out there. Keep on listening, guys.
SPEAKER_00Yeah, and Andrew, um, thanks again to you. And I think I'm always excited about uh podcasts, but the next episode is on investment lessons from the Comrades Marathon, and we will have some insights from people like Coach Perry, uh Bruce Fordyce uh as part of the build-up, uh Comrades Marathon, of course, uh in the middle of June. And there's so many lessons that can be unpacked from the Comrades Marathon. So even if you're not just an investment uh interest, if you're a sporting interest, you'll find the next episode really exciting. I hope you will. And uh thanks to everybody, and don't forget, um, please just subscribe, we would really appreciate that. Thank you.