How to maximise your retirement income

As you contemplate retirement, you remember that you will soon be eligible for one third cash lump sum benefit of your accumulated savings from the amount used to buy an annuity from an insurance company.

Annuity is a financial product which guarantees to provide you with an income for your retirement.

Since this two third balance would probably form the source of your monthly pay cheque in your sunset years, it is advisable to choose the right kind of annuity to suit your personal circumstances. Spend time looking for the right product to avoid regrets.

Perhaps you have heard many distressing stories from other retirees on their experience with a product but you still need to make some choices. You could even invest the two third balance and make gradual withdrawals from your retirement benefits.

Although this may look feasible, there is always the risk of either outliving your income or that your investments could fail to earn you enough money to stay afloat in old age.

This is an experience you would not wish to go through as it may force you to live below your preferred lifestyle as you try to cut back on expenditure or in a worse-case scenario, start auctioning your assets.

To save yourself the financial distress related to the risk of outliving your income, invest your two third balance in a vehicle that will give you a regular pay cheque as long as you live. This is where annuity comes in.

As you approach retirement, it is advisable to understand how the product works before you sign up.

An annuity refers to a contract offered by insurance companies that are designed to pay a set amount of money to the holder on agreed dates for life or an agreed term.

At retirement, a two third balance of the accumulated retirement savings is used to buy the annuity to guarantee lifetime payments.

Just like other insurance products, annuities are not the same universally but differ on their features from one company to the other.

It could be a cover that provides income for a lifetime or for a fixed number of years as agreed.

Other products provide a guaranteed stream of income and give variable earnings based on the investment market performance. Before picking one, it is important to shop around with a note on your requirements.

You would certainly wish to earn some significant monthly income from your annuity to keep you in comfort. The size of the monthly pay cheque will depend on various factors such as the type of cover, how much you invested and how well it is performing.

Upon leaving formal employment, a worker can choose to start receiving monthly pay from the annuity immediately or defer the payment for several years. In this case, you can buy immediate annuity or a deferred product.

Although not popular, you may find yourself in a unique financial situation that forces you to go for immediate annuity.

Some of these are early retirement due to ill health. This would require a regular source of income to pay for treatment.

You may also not have not saved a significant amount so the one third lump sum payment from your scheme could be insufficient to meet your other financial obligations— perhaps the repayment of a loan.

This may force you to take immediate annuity to start earning as soon as you quit employment.

Conversely, most retirees prefer deferred annuity where they can choose to delay their pay cheques. Just like immediate annuity, deferred annuity only suits certain situations.

For instance you could decide to go for early retirement and delay your annuity pay cheque until you attain the normal retirement age.

Sometimes with proper financial planning, the one third lump sum payment may be sufficient to push you for a while.

In instances where you face litigation for unpaid debts, you may delay the payment until your case is settled. In many countries, annuities are protected from third party claims against personal assets.

It is important to note that inflation will still be a threat to your purchasing power whether you opt for immediate or deferred cover.

To protect yourself from inflation risk, you can either go for fixed or variable annuity. Fixed annuity although preferred because of the ease of budgeting and planning, will guarantee you a fixed regular income, implying that you will be exposed to inflation risk.

Variable annuities have an escalation feature in which the level of instalments or the amount of regular pay is increased annually on an agreed rate to offset the effects of inflation.

Lastly, you can choose how long to receive your payment by picking a guarantee period.

This duration, which can be up to 15 years, means that if you die during that period, your income will be guaranteed until the end of the guaranteed payment time. However, should you die after the guarantee period, the annuity will stop paying.

Mr Opiyo is Training Manager & Coach with Tolerance Employee Financial Advisors Limited. Email: [email protected]