Getting my seaside cottage depends on this one retirement decision

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of 10X Investments.

The next time I move houses, I want to live on a beach in a little blue-washed cottage with a small stoep, a room with enough light to paint – I do paint, sometimes not badly either – a well-lit study to write books in, enough space for all my other books, and lots of space for my pets to enjoy.

Yes folks, this is my retirement dream.

I want this little beach house to be at least five kilometres away from the nearest person, and 10 kilometres away from a small town where I can do my shopping. However, this is going to require money.

Let’s say I actually make it to retirement with some money intact. Not Monopoly money (even though I always win), but real savings that should – I pray – carry me through the rest of my life. The next decision, in other words, what to do with that money, is the big one because I need to figure out how to turn that into an income from the day I retire through to whenever I might die, without getting it horribly wrong and dying poor and destitute in the road outside someone else’s cottage.

Saving a large chunk of money – check here how much you’ll need – is one thing, working out how to make it last for goodness knows how long is another. And that’s assuming I live for however long. My cat may finally succeed in killing me tomorrow, despite the fact that I put a light up above the stairs to dispel her favourite shadows. In which case every cloud still has a silver lining as my daughter would get my savings (and outside my estate I might add, if that savings is in a Reg 28 vehicle or a living annuity).

But assuming I’m not killed by a feline assassin tomorrow, chances are I’ll live for quite a while still. This is where the living annuity versus life annuity decision becomes really important if I really want that seaside cottage. And I do!

What is a living annuity?

A living annuity feels a bit like being told, “you’re still in charge”. My money stays invested, and I draw an income from it each year within certain limits. I get to decide how much, how often, and I can adjust it as things change.

And things will change. Costs such as grocery bills creep up every year. Some spike as fuel prices leap, other new costs arrive the older I get.

*the laughter of the medical aid providers rings in the background*

So having flexibility isn’t just nice – it’s necessary. I also get to decide how my money is invested. If I want to be cautious, I can be. If I want to take on a bit more risk, that’s an option too. And if I change my mind later, I can adjust.

And if I don’t spend everything, what’s left goes to my child, no tax at all. Which really matters to me.

But that control comes with responsibility. If markets have a bad run, my income could take a knock. If I draw too much too early, I could run into trouble later. There’s no safety net here – it’s on me to get it right and not outlive my money.

I could end up in a nasty situation where I need to take on a job at the age of 70 or something – and who wants to be job hunting at that age?

What is a life annuity?

A life annuity is the opposite. I turn my money into something akin to an insurance policy, and, in return, I am ensured a guaranteed income for life. I don’t need to make investment decisions or worry about what markets are doing – even if Trump starts another war.

There’s something very appealing about that simplicity. I still need to decide upfront about how that income grows – whether it tracks inflation or increases at a fixed rate – but once I’ve chosen, that’s it. Locked in.

I can’t change anything later. I just have to live with the decision I made at the start and maybe have to be a part-time cashier anyway.

It’s also important to understand that, when I die, there’s nothing left from that capital to pass on. The insurer (or whoever) keeps all of it.

Which annuity is right for me?

Neither option is perfect because both involve trade-offs. With a living annuity, I carry the investment risk and the risk of running out of money. With a life annuity, I give up flexibility and hope my initial choices hold up over time.

Thankfully, there is a middle ground in the form of a blended approach: part of my money can secure a guaranteed income, covering the basics. The rest can stay invested, giving me flexibility and some control.

Because if there’s one thing I have learnt recently is that the saying life is what happens when you are making other plans is too true. Also, that life throws you curve balls.

Which may go some way towards explaining how I ended up with two new sets of neighbours who must both be deaf. There is really no need to have a TV on so loud, let alone two.

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My dream of an idyllic cottage on the beach for my assorted pets and I, kilometres away from the next person, depends on me having enough capital to service any debt effectively, but also making sure I have enough to cover my needs (having been realistic about those needs upfront).

Before making any of these decisions, though, it really does pay to have a sounding board. I can chat to the investment consultants at 10X for free – they live and breathe retirement – or go the financial advisor route.

Either way, the final call is mine. Just like it’s yours.

So, take your time, do your homework, and don’t let anyone rush you into anything.