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In 2014, Allan Gray tested Bengen’s theory using portfolios with at least 55 percent in South African equities and the rest in local bonds over 84 different 30-year periods.

Sticking to the rule resulted in the capital being able to sustain the drawdown in 93 percent of the cases, and Allan Gray declared it a good rule for South African living annuity investors.

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Many living annuitants run into problems, because they have too little capital to provide a sustainable income, they live longer than they have provided for, they draw an income at too high a level, or they make poor investments/receive a succession of poor returns, which depletes the capital to a level from which it cannot recover.

Widespread concern United States researcher and educator Michael Finke, dean and chief academic officer of The American College, is so concerned about the complexities of investing and drawing an income in retirement that he introduced a new qualification for financial advisers – the Retirement Income Certified Professional designation – in the college’s financial planning department. “The way we deal efficiently with this risk is to pool it with other retirees.

And financial advisers are not incentivised to recommend them, because the commissions they make from guaranteed annuities don’t match the fees the earn – typically, one percent of assets under management – from investment-linked annuities.

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The paper also demonstrated that retirees who bought a living annuity for the first 10 years of their retirement at age 65, then switched to a guaranteed annuity, also received less value than retirees who opted for a guaranteed annuity upfront. To encourage retirees to make greater use of guaranteed annuities, some product providers have developed what are known as “hybrid” annuities that offer you a level of guaranteed income and the rest in a living annuity, or switch you from a living annuity to a guaranteed annuity at a strategic point in retirement.

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This article was first published in the second quarter 2017 edition of Personal Finance magazine.

This problem is often referred to as the “annuity puzzle”.

It raises the question of whether we appreciate the risks and ask the right questions.

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