One of the biggest challenges faced by the newly-retired is how to generate a regular income stream from their investment assets, and to make sure the money lasts as long as they do!
There are of course many ways to get cash from your investments. For example, cash can come from dividends or interest payments, or from selling some shares or bonds. However, dividend or interest payments may be only once or twice a year, or if partially selling, what to sell? Then there are the unknowns, like how long will I live for (and need money), what if interest rates fall, what if the sharemarket crashes?
All up, its complicated.
Overseas, annuity products are a popular way to get around some of these issues. Essentially, with an annuity, you buy a regularly-recurring income stream, which usually lasts for as long as you live. There are two great benefits with annuities: (1) frequent, regular cash payments and (2) certainty – you will keep getting paid until you die, regardless of how long you live.
In New Zealand, annuity offerings have been few and far between. However, the Lifetime Income Fund, launched in 2015 is a promising, relatively new product which does provide a lifetime annuity. In essence, you invest upfront into a managed investment fund, and you receive a fixed fortnightly or monthly cash payment for the remainder of your life. Your original investment, plus investment proceeds, less fees, is drawn down until it reaches $0, but your regular cash payments will continue even after your investment balance runs out, paid for by an insurance policy (which you pay fees to fund). If you die before your investment balance is fully depleted, the remainder will be returned to your estate.
An example provided is an initial investment of $100,000 at age 65 will return $5,000 per year (5%) for the rest of your life.
This type of product provides the certainty of fixed, regular payments, and removes the risk of outliving your income, plus the risks of market crashes or interest rate falls. However, there are still risks, one being that this is a young product, and if there is insufficient demand, or if it proves unviable, you will not get the benefit of the lifetime payments (although you will receive back the balance of your investment, less payments made and fees incurred).
Its great to see this sort of product available in New Zealand, and I hope we may see more annuity-type offerings to follow.
Link to Lifetime Retirement Income website.
Dean Edwards
Please note that Nest Egg Investments is fully independent and does not receive commission or payments of any sort from any product providers.