How Does the Intelligent Annuity Work?

I save, you save, all our clients save money. We save for retirement, for our children’s education, or to build our wealth by investing, preventing inflation from eroding its value. Simply put, we are saving so that our children will be better off in the future.

However, many of you have already reached that imaginary point. You have been saving for years, working long hours to make money and save more. Now is the time to reap the benefits of your work and focus on what you enjoy. From the very beginning, Finax has endorsed goal-oriented investing.

But what happens when you reach the goal and save the amount necessary for improving your retirement? Should you keep the money in a bank? You will spend decades of your life saving for retirement. That's why it is important to know what happens once you achieve your goal.

A Unique Solution for Modelling Future Regular Withdrawals

State pensions are not worth much. They will no longer guarantee you a sufficient standard of living and the degree of pension compensation will continue to decrease. Therefore, many of you are already thinking of retirement today, building up your own savings alongside contributions to the state system.

As good financial managers, you know that if you leave your money in the bank, inflation will erase 2-3% of its value each year. On average, people in Central Europe can expect to live approximately 15 years beyond the official retirement age. Such horizon is sufficiently long for investing to come into play.

It is more advantageous for clients to have their money invested during such a long period, only selling a small portion of their investment at each withdrawal. The problem arises when you cannot determine how large your withdrawals should be or for how long your portfolio will last. This is when our robo-advisor comes to help.

These Are the Primary Benefits of an Annuity Account in Finax:

1. automated sale of the agreed part of the portfolio and transfer of the proceeds to your bank account on the last working day of each month;
2. the robo-advisor algorithm will help you choose the right investment risk by taking into account your degree of dependence on Finax income;
3. we will advise you on the deposit amount so that would provide you with the desired retirement income and show you how much you can withdraw per month without depleting the portfolio over the required horizon;
4. we will model the expected portfolio development and the withdrawal amount;
5. each year, we will automatically increase your withdrawals by the average long-term inflation rate of 2%, similar to how pensions are adjusted today;
6. we can set the withdrawal amount according to your desired final portfolio value, either trying to preserve its initial value or gradually drawing it down to zero;
7. we offer more than 2000 regular withdrawal scenarios.

What Does the Online Account Opening Process Look Like?

In the case of the Intelligent Annuity program, our questionnaire had to undergo significant changes. Regarding the horizon, we ask the clients for how long they would like to draw income from their annuity account. The basic premise is that you want to receive it for at least 10 years.

However, in extraordinary cases, we have also made it available for horizons of at least 5 years. This is possible if you want to use it for securing your children's income while studying at a university, a goal for which many of us save over many years. For horizons shorter than 10 years, we only offer one possible risk strategy: 30% equities and 70% bonds.

The minimum investment will be set at 50,000 euros. Clients who have been saving with Finax for at least 5 years will be allowed to make use of the regular withdrawal program from as little as 10,000 euros.

An important question, necessary for choosing the right risk, is to what extent will you be dependent on regular withdrawals from Finax to cover your basic expenses. Therefore, we will require you to think about your family budget and also calculate other planned incomes or expenses during your retirement.

We know that all of us would like to draw at least 1,000 euros per month for 30 years from a deposit of 50,000 euros. Let's be honest, this does not add up and Finax is not a miracle money-making machine. We can only offer you a combination of risk and withdrawal amount that would allow the portfolio to meet your expectations with more than 90% probability.

In the question about income sources, investments are automatically included, as you will receive such income from Finax. However, you can also indicate other sources of income.

The estimated future development of the investment cannot be guaranteed, but we have tested more than half a million of possible scenarios of stock exchange development when we were setting up the Intelligent Annuity.

Our statistical models indicate that every possible combination of risk, horizon, portfolio target value, or your opinion on market decline results in more than a 90% chance that what we promise will actually be achieved by your portfolio.

The following two questions will be crucial for the maximum amount of your monthly withdrawal:

1. whether you want the portfolio to maintain its value for future generations (after inflation), or you would like to spend it all on your regular withdrawal;
2. whether you can tighten your belt if stock exchanges start to fall.

Common sense applies here. If you don't mind not having anything left in the end (in a negative scenario), you can withdraw more per month. In the event of a decline on stock market, the portfolios, from which withdrawals are made, suffer twice as much - a decrease in value and the withdrawal itself. Therefore, if you tighten your belt during the downturns, it will enable us to increase the withdrawal amount during the prosperity years.

Switching off or limiting the withdrawals is dependent on the decrease of the equity component of the portfolio (Finax 100/0) by 20% from its maximum, or as the case may be by 30% from its maximum. The development data, modelled by us from 1 January 1988 to 28 February 2019, show that this portfolio recorded declines of over 20% in 73 months, or rather a decrease of 30% in 45 months.

It has to be noted that this period includes two major crises - the collapse of the internet bubble between 2000 and 2003 and the financial crisis between 2007 and 2009.

If you are able to tighten your belt and reduce the regular withdrawal amount during the period of falling markets, in case stock markets decline by 20%, you would only receive 75% of the regular withdrawal amount. If they decline by more than 30%, you would only receive 50% of your regular withdrawal amount. So, for example, if your monthly withdrawal was 400 euros, you would only receive 300 euros, or as the case may be, 200 euros.

If you do not have to withdraw anything during declines, you would only receive 50% of the original withdrawal amount, in case of a decline of more than 20%, and you would not receive any withdrawal in case of a decline that is above 30%.

Investment Plan Models the Portfolio Development and Withdrawals

After completion of the questionnaire, we will offer you an investment plan proposal. This step has also undergone major changes.

We will not show you the deposit amount, as that is stated. However, we will show the monthly or the total withdrawal amount. Move the cursor over the chart to discover the monthly withdrawal amount over time. It increases by an average inflation rate of 2%. In the example shown below, I started with a monthly withdrawal of 265 euros, but in 9 years Finax will send me 316 euros.

In total, starting with a deposit of 50,000 euros, the client will withdraw 77,160 euros over 20 years and it is still expected that they should have on average 18,000 euros left in their account at the end of the horizon. The client would thus benefit from the original investment in the total amount of 95,160 euros, which is almost twice as much as if it had been kept in the bank account.

For the regular withdrawal product, the choice of risk is limited both from above and below.

The maximum possible risk strategy consists of 80% equities and 20% bonds, while the recommended maximum risk strategy consists of 70% equities, even if a portfolio with 80% equities would be suitable for your risk profile. Riskier portfolios are prone to very high volatility, which is not suitable for regular withdrawals.

On the other hand, we have limited the risk from below. The portfolio with minimal risk consists of 30% equities and 70% bonds, which is desirable given the long-term investment horizon. With less risk, you would be deprived of potential return on such a long horizon.

For more than 2,000 combinations, our algorithm will offer you the maximum possible regular withdrawal, which will ensure that your portfolio will most likely last for the entirety of the intended horizon.

If you would prefer a higher withdrawal, enter your request and the algorithm will tell you how to increase the deposit so that it will provide you with the desired income.

In some cases, the algorithm will offer you a solution which may seem like you will have a lot of money remaining at the end of the investment horizon. The reason for this are possible negative scenarios, which our algorithm takes into account over a long period of time.

The Rest Remains Similar

The following steps are no different from the current registration process. It is important that, as with other accounts, you are able to make changes to your investment profile settings, and, in the advisory section, we will model the future development of your portfolio taking into account the changes you have made.

One of the few things that the system does not take into account yet is the tax aspect of withdrawals in the first year of investment. We would like to hear from the clients first what their perception is. Whether they prefer to pay taxes for the first year or begin with the regular withdrawal after the first year of investment.

We believe that our new product will appeal to you. If something is still not clear, or you find our new product too complicated, write us or give us a call and we will try to answer all of your questions.