Retirement: Working with what you’ve got

Discussions around retirement typically revolve around having the required funds to live comfortably once a person stops working. This ‘income for retirement’ is what most of us save up for during the bulk of our lives.

But what happens when it comes time to decumulate that wealth?

Arthur Case, Brand Marketing Director at Evergreen Retirement Holdings, believes more must be done to highlight investment strategies around this critical aspect.

Decumulation refers to the stage in your life when you start drawing retirement income from your portfolio. But one of the key concerns for any person approaching retirement is whether there is enough saved especially given how life expectancy has increased over the years.

So, instead of spending 10 or 15 years in retirement this could easily translate to 20 or 25 years. This puts an enormous amount of pressure to ensure people’s funds still work for them when they are no longer able to or want to.

“Of course, this is not only a challenge in South Africa but globally as well. Many who fall into the baby boomer generation category still think they will be able to pull a rabbit out of their hat during the last few years of their working life. With this being unlikely, they need to wise up as to how to work with the capital they do have available,” says Case.

Perhaps the most concerning aspect is that financial advisors often disappear during the decumulation phase of one’s life. With advisors generously compensated for growing assets during the investment cycle, they don’t seem to be available to offer advice when those funds start eroding or need to be spent on buying a retirement property.

“In fact, one of the most pertinent questions retirees are asking themselves is where they are going to see out their twilight years. The where and how they are going to live become significant questions that will fundamentally impact the rest of their lives. Things like whether they want to live in the same home or look at downsizing to an apartment, or perhaps residential or retirement estate are all burning questions that they need to work through.”

Too often, when people are concerned about their future, they put their heads in the sand and hope it will miraculously work out for the best. Sadly, the reality does not always work that way.

When it comes to property, there are several models to consider. On the one hand, there is the traditional approach of buying a sectional title or a freehold property in a retirement village. On the other, is the increasingly popular life rights model.

“This sees a person buying the right to occupy a property for the rest of their life. Typically, this is done via a once-off payment with the original capital returning to the estate of the life right holder when they pass away. In other words, the person has the security of guaranteed lifetime occupation of a property.”

One of the ways this is different to the traditional concept of buying property is that the developer of the estate stays involved even after the building stops. It is all about building a long-term relationship with residents.

In contrast, with the traditional model, once an estate has been built, the developer packs up and goes on to the new project. However, in the case of life rights, the developer continues to invest in the village to keep it pristine.

“So, the developer stays involved and provides all the services and care required, taking out most of the cost and risk involved in managing your property. Going the traditional route, sees the need to form a body corporate with residents as members that need to manage everything themselves. Even if they opt to get a professional firm in to assist, the third-party will rarely be as committed as a life rights developer to ensure the success of the village.”

Furthermore, given the importance of a long-term decumulation strategy, there are flexible pricing models available when it comes to life rights.

“The standard strategy would be to pay the purchase price for the unit that is aligned to the market value. However, if this is unaffordable, then the developer can reduce the purchase price and is then compensated by reducing the capital paid back at the end, so the person’s estate might only get back 60% to 80% of the original capital. This is certainly proving to be a boon for people concerned about what will happen to them during the decumulation stage of their lives,” he concludes.