EXCELSIOR INVESTMENTS. Post-Retirement

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2 Your financial planning does not retire when you do Your retirement has finally arrived and a long-awaited chapter in your life begins. By now you should have built up an adequate capital base to provide you with an income during your retirement years. Bear in mind, however, that your retirement capital has to last for the rest of your life. Careful and continuous planning is therefore necessary to make sure you that don t outlive your capital. Options to provide for your retirement income Liberty Life offers two main types of annuities life annuities and living annuities to cater for your retirement income needs. When deciding which one to select, it is important that you understand the benefits of each. 1. Life Annuity A life annuity pays a guaranteed income until you die. This type of annuity is especially suited for the person who has no other material source of income or capital. In addition, you have the following flexible options under a life annuity: Single life or joint lives. The annuity can be taken on one life only (single life), or on the lives of both the husband and wife (joint lives), in which case the annuity only ceases when the last surviving spouse dies. Income options. You have a choice of a level, escalating or CPI-linked income. An income which is linked to inflation should be the default for all retired individuals as it ensures that the purchasing power of your income is maintained for the rest of your life. Guarantee periods. You may select a guarantee period of between one and 20 years. Should you die before the end of your selected guarantee period, your beneficiaries will receive the annuity payments for the remainder of the guarantee period. If you die after the guarantee period has expired, the annuity ceases. A life annuity will be the most appropriate option for the majority of retirees. 2. Living Annuity With a living annuity, you determine the level of income you receive (within regulatory limits) and the underlying investment strategy. However, you bear both the investment risk and the risk that your capital runs out before you die.

3 While a living annuity is extremely flexible, it is not suitable for everyone. It is designed to meet the post-retirement needs of individuals who have alternative sources of income should they outlive their annuity. You should therefore give careful consideration to the risks of a living annuity before you select this option. Some important considerations in planning your finances after retirement 1. Longevity is on the increase Your post-retirement income nowadays has to last much longer because people are living longer. The average life expectancy of men is currently 79 years and that of women 85 years. In deciding between a life annuity and a living annuity, the risk of living too long is an important consideration. With a life annuity the assurance company takes the risk that you live longer than expected; with a living annuity, you will need to make provision for this risk. 2. Inflation Your retirement could easily span 20 years or longer. In planning your income after retirement, you need to make provision for your income to increase in line with inflation each year. If you do not, the purchasing power of your retirement income will be eroded over time. The following graph illustrates how different rates of inflation will erode the buying power of R per month over time. It illustrates the importance of buying an annuity that keeps pace with inflation. With a level annuity you may initially receive a higher income, but the buying power of your money will reduce by the inflation rate each year, buying less and less in time Buying power of income (Rand) Year 4% p.a. 5% p.a. 6% p.a. 7% p.a. 8% p.a. Source: Liberty Life

4 3. Healthcare costs Historically, medical inflation has been much higher than general inflation. If this trend continues, healthcare-related costs, including medical scheme contributions, will absorb a growing percentage of your income over time. In planning your income after retirement, you need to allow for: 1. The expected cost of medical scheme contributions each year 2. The cost of any medical treatment not covered by your medical scheme As the following graph shows, average medical costs increase rapidly after age 60, so it is important that you make provision for this in your planning Average medical cost (Rand) Age Source: Liberty Life Please note: These costs are based on average 2004 expenses in each age group. Future inflation has not been taken into consideration. Investors who are considering a living annuity need to bear a few further considerations in mind: 4. Investment strategy If you select a living annuity rather than a life annuity for your post-retirement income, you have control over the investment strategy to be followed.

5 Many people make the mistake of following an overly aggressive investment strategy to try and compensate for having an inadequate amount of retirement capital. High volatility of returns from month to month is a negative characteristic for anyone drawing an income on a monthly basis, and can result in a rapid reduction in your retirement capital if market performance is poor. In determining your investment strategy if you do select a living annuity, you should bear in mind that: Certain income earned on the underlying assets are subject to Retirement Funds Tax at a maximum of 9% making this product more attractive than where the same income is subject to tax at the individual s maximum tax rate. assets such as cash and short-dated bonds have historically delivered less volatile returns from month to month than equities. You can therefore include a higher fixed-interest component in your investment strategy in order to reduce the volatility of monthly returns without being impacted from a taxation perspective. 5. Level of income selected With a living annuity, you determine the level of income you wish to receive each month within regulated parameters. However, you also bear the risk that your capital runs out while you are still alive, leaving you with no further income thereafter. The graph below illustrates how different percentages of income drawn from your initial capital can affect the value of your living annuity over time, assuming an 8% per annum investment return Retirement capital Years since inception 5% Drawing Level 8% Drawing Level 12% Drawing Level 20% Drawing Level Source: Liberty Life

6 The message from the graph is clear: Only select a living annuity if you have other sources of income in case your capital runs out prematurely, and do not select an income of more than 7% of the capital amount in the current inflationary environment. Invest with a financially sound partner It is vitally important to invest with a financial company with a sound track record. Liberty Life is one of South Africa s largest and best capitalised financial services companies, a benefit that cannot be underestimated in today s volatile markets. You can make the best of your golden years Your retirement years can be one quarter or even longer of your life span. An accredited Liberty Life financial adviser or broker can do an analysis of your financial needs to assist you in your retirement planning. By planning right and making the right investment choices when you retire, your retirement can indeed be the proverbial golden years of your life. The information contained in this document does not constitute advice by Liberty Life. Any legal, technical or product information contained in this document is subject to change from time to time. If there are any discrepancies between this document and the contractual terms or, where applicable, any fund rules, the latter will prevail. Past performance cannot be relied on as an indication of future performance. Investment performance will depend on the growth in the underlying assets, which will be influenced by inflation levels in the economy and prevailing market conditions. Liberty Group Limited an Authorised Financial Services Provider in terms of the FAIS Act (Licence No. 2409) design@liberty E 0093/06