Tired of work: how much does it take to become an annuitant?
The holidays are already over and the return to the open space gives you a blues boost?
Tired of transport, work, colleagues? Want to throw it all away?
Here’s how to live on your pensions and take a very long vacation.
Start by estimating your monthly need
It’s possible to become an annuitant without being an heir… provided you don’t have a lavish lifestyle!
How much do you need to live?
Take stock of your current expenses. Don’t forget that if you stop working, you will eliminate certain costs (for example: reduce the cost of housing if you free yourself from the constraints of proximity to an employment pool), but potentially increase other expenses (how will you use your free time?).
Rather than living on your pensions at 100%, you can also aim for a regular income supplement. This will be necessary, for example, if you want to work part-time or pursue a less remunerative job passion.
Have you defined how much you want to earn per month? Perfect! Let us now estimate the capital required to generate this rent.
How much does it take to become an annuitant without touching the capital?
This table indicates the capital to have to generate a certain amount of income per month.
Interpretation: to obtain an annuity of €1,000 per month, or €12,000 per year, you must hold capital of €300,000 and invest it at 4% annually.
This simple reasoning comes up against a painful reality: the returns in this table are incompatible with capital-guaranteed products. You must necessarily accept a risk to obtain these levels of remuneration. Your wish never to dip into the capital contradicts the financial risk it will undergo.
How much does it take to become an annuitant by agreeing to touch the capital?
Another approach is to ask how long you can draw on capital before it runs out. It is obviously assumed that the capital is invested and earns interest.
Reading: A capital of €500,000 invested at 3% per year will be completely exhausted after 31 years if €2,000 is withdrawn per month.
This table is certainly more complex, but it remains very theoretical to be realistic.
One of its pitfalls is that it considers a fixed rate of pay.
In practice, to achieve rates higher than the risk-free rates (currently close to 0%), you will have to take a risk, for example investing in shares. This leads to capital fluctuations. However, these fluctuations increase the risk of running out of capital, even if the long-term trend is positive.
Indeed, once capital is withdrawn, the sequence of annual returns (the order in which they occur) matters. A regular return of 4% will preserve the capital better than an average return of 4% with variations (-2% one year, +10% the next…).
Calculating how long capital will survive in an uncertain world is more complex than it sounds. This is the job of insurers when they serve life annuities!
Much has been written on the subject, particularly in the Anglo-Saxon world where the themes of financial planning and preparation for retirement are crucial, given the underdeveloped pay-as-you-go retirement system. It is impossible to summarize all this field of study in a few lines.
Above all, remember that this table represents an order of magnitude rather than a truth. It tends to overestimate the lifespan of capital, all the more so when the rate is high.
Become an annuitant with the ideal SWR and the Trinity Study
The SWR: the secure capital withdrawal rate
If you had to remember only one number when you want to become an annuitant, it is the SWR: the safe withdrawal rate, the rate of secure withdrawal of capital. In other words, the proportion of your capital that you can consume each year while limiting the probability that it will run out.
When we talk about capital, we are talking here about a properly diversified portfolio between stocks and bonds, in which we periodically draw a given amount. We, therefore, accept a capital risk, and we consume the capital, but we expect the latter to progress and compensate for our withdrawals.
The more you withdraw, the more you increase your risk of early ruin. The less you withdraw, the more you increase the life of your capital. Sometimes you will withdraw more than the growth of your portfolio during the year, it is normal.
Professionals are very divided on what constitutes a healthy SWR. Some believe that we should limit ourselves to 2%, others that we can go up to 5% per year. It also depends on your objective (to consume all the capital or have something to pass on?) and the asset allocation used.
The subject is widely debated. The dedicated page on the Bogleheads site (the American community of fans of John Bogle, the father of index funds and founder of the Vanguard company), will tell you everything you need to know on the subject. Here again, it is impossible to summarize the many research works while remaining rigorous: it is best to consult several sources if the subject interests you.