STATISTICS reflect that only 6% of the working force reach retirement age with sufficient capital to maintain pre-retirement lifestyle. The reasons are:

Longevity

The longer you live, the more capital you will need to fund your retirement. Life expectancy for a man at 65 is 19 years and for a woman, 22 years. This reduces as we grow older, but will never reduce to zero and the average 85-year-old can expect to live a further seven years.

The more information known about an individual, the more accurate the life expectancy calculation will be. Lifestyle and medical situation also play a significant role. A 65-year-old man who smokes, earns R5000 a month, is a cashier and has mild medical conditions has a life expectancy of 11 years. A man who has never smoked, earns R50000 a month, is an accountant and has no diagnosed medical conditions has one of 23 years.

The "expectancy" is the average. Both men have a 50% chance of living beyond their life expectancy. So, by only planning for individual life span, you're basically going to the roulette table and putting your retirement money on red or black.

Traditionally, insurance firms looked at age and gender when determining life expectancy. However, I was recently introduced to a new generation concept designed by Paramount Life that looks at this issue very differently. They underwrite risk, based on individual circumstances at retirement. Looking at their rates and comparing them to the market, it appears more advantageous for the not-so-healthy person to think about investigating as their pensions could be much higher. Paramount bases this on the likelihood of having to pay for a shorter period than would normally be actuarially calculated.

Escalations

Pensioners have the highest rate of inflation revolving around increased costs of medical aid, electricity, food and transport. In my opinion, this averages at above 10%. For this reason, their pensions will need to increase yearly, otherwise, 10 years into retirement at a 7% inflation rate, they will only be able to buy half of their previous needs.

Investment returns

It is crucial that "above" inflation returns are achieved. If pension money is invested too conservatively and when taking costs into the equation, if returns do not exceed inflation by at leas t 3%, you will battle to make ends meet.

You have two options when exiting a pension fund or retirement annuity: Guaranteed/fixed annuity returns are calculated by actuaries at the life assurer and most companies use age and gender to determine rates. Paramount also factor in health status.

Living annuity

Retirees make the call regarding income and how funds are invested. While it's difficult to recommend a fixed annuity now as interest rates are so low, Paramount certainly has the edge . Those with shorter life expectancy should compare annuity rates if deciding on a fixed annuity.

- E-mail bryan@bhca.co.zaweb