Secure Your Retirement. Брюс Кэмерон

000Drawdown–7%–R420 000New valueR4 380 000R35 000R420 000Inflation rate–5%–R300 000New totalsR4 080 000R35 000R420 000

      Table 1.2: End of year two

		Investment value	Per month	Per year	Drawdown %
Start value		R4 080 000	R35 000	R420 000	10.29%
Market improvement	10%	R408 000
Drawdown	–10.29%	–R420 000
New value		R4 068 000
Inflation rate	–5%	–R204 000
New totals		R3 864 000

      Table 1.3: End of year three

		Investment value	Per month	Per year	Drawdown %
Start value		R3 864 000	R35 000	R420 000	10.87%
Market improvement	5%	R193 200
Drawdown	–10.87%	–R420 000
New value		R3 637 200
Inflation rate	–5%	–R193 200
New totals		R3 444 000

      At this point, the market improvement is generously provided at 8.5 percent a year (inflation + 3.5 percent growth).

      Here is what happens at the end of year eight:

      Table 1.4: End of year eight

		Investment value	Per month	Per year	Drawdown %
Start value		R2 181 793	R35 000	R420 000	17.5%
Market improvement	8.5%	R185 452
Drawdown	–17.5%	–R381 814
New value		R1 985 432
Inflation rate	–5%	–R109 090
New totals		R1 876 342

      In year eight, you reached your maximum drawdown of 17.5 percent. This is called the point of ruin, where your income will drop in real terms – and that is before inflation. In buying terms, because of inflation, your buying power would have reduced a few years earlier. Now you can see why it is called the point of ruin.

      The problem with the COVID-19 pandemic is that you will never know when investment markets will recover in the longer term. For example, in nominal terms without inflation, the New York Stock Exchange took until 1952 to recover from the Great Depression of 1929, and the Japanese Nikkei stock market, whose index reached the dizzy height of 30 000 in 1992 before dropping to about 12 000, is still nowhere near that mark 29 years later.

      With the SA Reserve Bank predicting a GDP rate of negative 7 percent for the year, the current market and the rand’s poor trajectory are hardly likely to see reversals during such a volatile time. Predictions are that the world average GDP growth will be negative 6 percent.

      The effects are likely to be devastating for the South African economy. Tax collections are going to be dramatically down, and the government will have new debts to pay because of money it has borrowed to try to sustain the economy during the lockdown. So, with more to pay out and less money available to do so, we need to watch out for another debt downgrade.

      Around the world, we are seeing a far wider reach of problems related to COVID-19 than we did with the 2007–2010 property meltdown. Unlike then, however, we now have almost every industry involved, particularly in countries that are in virtual lockdown. For example, in 2008, shops, theatres and restaurants stayed open, and people were allowed to travel, but this is not the case with the COVID-19 crisis. Investment markets will be more volatile and take longer to recover this time as well.

      And it is not only the COVID-19 pandemic. We have the Saudi Arabian and Russian fuel war, which has already shrunk the oil price internationally and hit Sasol, a major contributor to the South African economy, reducing its share price by 95 percent in the first days of our national lockdown.

      Solutions

      Against this background, take a look at the drawdown rates for pensioners using a living annuity as a pension proposed by the industry body, the Association for Savings and Investment South Africa (ASISA), and the draft proposals by the regulator, the Financial Sector Conduct Authority (FSCA), for a Standard on Living Annuities relating to default annuities offered by retirement funds.

      ASISA details how long your income is likely to last before you hit the point of ruin:

      Table 1.5: Years before your income in rands will start to reduce

Drawdown rate	Annual investment return before inflation but after costs
	2.5%	5%	7.5%	10%	12%
2.5%	21	30	50+	50+	50+
5%	11	14	19	33	50+
7.5%	6	8	10	13	22
10%	4	5	6	7	9
12.5%	2	3	3	4	5
15%	1	1	2	2	2
17.5%	1	1	1	1	1

      Source: ASISA Standard on Living Annuities

      The FSCA states in a second draft of a Standard on Default Annuities that the recommended drawdown rates for default funds by age should be as follows:

      Table 1.6: Proposed default annuity drawdown rates by age

Age	Drawdown
55	4%
60	4.5%
65	5%
70	5%
75	5.5%
80	6%
85	7%

      Table 1.7: Proposed maximum default annuity drawdown rates by age

Age	Drawdown
55	6.5%
60	7%
65	8%
70	8%
75	8.5%
80	9.5%
85	11.5%

      These FSCA lists make a lot of sense and should be followed by all annuity holders!

      Now look at your expected average age of death. According to figures from the Actuarial Society of South Africa (ASSA), any female who reaches age 60 can be expected to live until 84, and any male at age 60 can be expected to live until 78 (these estimates apply to people who earn more R30 000 a year). For a couple aged 60, there is a 50 percent chance that at least one of them will still be alive at age 90. But these are averages – a lot of pensioners will live beyond these estimates.

      If you want to live free of the point of ruin, you need to reduce your odds of running out of money. Your target should be to hit the 10 percent chance of living to 90 rather than assuming you will be part of the 50 percent average. This means that males must look ahead to reaching age 90 and females to 100, resulting in a planning horizon of 35 to 40 years.

      Assuming an initial investment return on the average of 50 percent, only females with a drawdown rate of 3.44 percent (at most) can expect to be virtually free of their point of ruin; and only males with a drawdown rate of 4.22 percent (at most) can be more or less sure of their income until death. Any higher initial drawdown will lead to ruin.

      But these tables are likely to be on the optimistic side. There is a lot of research both here and overseas that indicates that at age 60, you should not have a drawdown rate above 4 percent.

      The problem is that many South African living-annuity pensioners are currently in serious trouble. With an average drawdown of about 7 percent, they are already beyond their limit.

      Another problem is the structure of averages. Living-annuity pensioners are affected by the amount of capital they have, thereby generally understating the average drawdown rate