Drawdowns have positive and negative implications for our long-term financial planning. Although ideally, withdrawals should be around 4% to weather any storm, your optimal withdrawal is dependent on multiple factors such as your age, investment strategy and individual cash flow needs. In a time where we feel more helpless and unable to control the outcomes, it is worthwhile looking at some proactive ways we can protect ourselves in volatile times when it comes to drawing down from investment portfolios.
1) Try delay unnecessary withdrawals.
Try not to withdraw funds out of your portfolio unnecessarily. This will happen naturally to an extent as we are not allowed to travel and are staying home. Consider delaying the purchase of vehicles and postponing overseas travel to 2021.
2) Cut back on monthly expenses over lockdown.
Cutting back could allow you to stop or lower your withdrawals from your liquid assets, even if just temporarily while on lockdown. By reducing your drawdown, you reduce the losses realised as the impact of sequencing risk. Your drawdown on liquid investments can be amended at any time so when lockdown measures lighten, and your budget needs to be adjusted, you can readjust your withdrawals where needed.
3) If you are unable to reduce costs, try ways to budget around keeping your withdrawals unchanged.
Do this in consultation with your Retiremeant™ Specialist. They would have already structured your income as efficiently as possible at your last income review. There may be some short-term scope to reduce your risk and the impact of negative compounding. By simply not increasing your drawdown from last year, you can reduce the impact on your portfolios considerably.
4) Amending your Living Annuity drawdown if your anniversary is still months away?
With Living Annuities, you are usually locked into your income until the anniversary of the contract. However, National Treasury has just released COVID-19 tax relief measures on the 23rd of April 2020 that state the following:
“Individuals who receive funds from a living annuity will temporarily be allowed to immediately either increase (up to a maximum of 20 per cent from 17.5 per cent) or decrease (down to a minimum of 0.5 per cent from 2.5 per cent) the proportion they receive as annuity income, instead of waiting up to one year until their next contract “anniversary date”. This will assist individuals who either need cash flow immediately or who do not want to be forced to sell after their investments have underperformed.”
This means that should you be receiving surplus income from a Living Annuity, you are able to apply to reduce your Living Annuity incomes (down to a minimum of 0.5%). Any changes must be done in consultation with your Retiremeant™ Specialist as they have likely already structured your incomes optimally for various reason specific to your individual planning.
In cases where you are under severe cash flow strain you can also increase your Living Annuity drawdown (limited to a max of 20%), but this should be last resort where possible as SARS will still charge PAYE income tax on the incomes and higher drawdown in the current economic environment should be avoided as much as possible
5) Be mindful of your liquidity position.
It may be more advisable to maintain your current drawdown on a Living Annuity to create additional liquid funds if your Retiremeant™ Specialist identifies this as something to be cautious of in your planning. In Retiremeant™ Planning, Liquidity is still king, and should not be sacrificed for short -term reasons.
6) Don’t be tempted to reduce your Living Annuity payment to reduce tax.
It will result in having to increase your withdrawals on other assets which could negatively impact your Liquidity, as well as increase the sequencing risk on those investments. Instead, review your income planning with your Retiremeant™ Specialist. They can ensure that your income is structured as tax-efficiently as possible while catering for your long- term liquidity needs.
Now more than ever, it is vital to have a robust and flexible financial plan. This involves adjusting your planning to react to an ever-changing world. We will all likely come out of this lockdown with a greater sense of awareness of what is important to us, which will give even more meaning to our money.