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What is the intelligent regular withdrawal?

The goal of investing is to secure income and to maintain or even improve the standard of living after the end of the investor's active career. Finax also has the post-asset building phase in mind and offers a unique solution for clients, who want to enjoy their acquired assets. Intelligent regular withdrawal is a payout portfolio. What does it look like and why is it ideal solution for your pension?

Radoslav Kasík | Our process | 27. March 2020

Intelligent regular withdrawal is another unique solution for your money, that is currently unparalleled in Slovakia.

What is the Intelligent regular withdrawal?

Intelligent regular withdrawal is a payout or an annuity portfolio. Annuitants are people who live from the income generated by their assets. As this definition suggests, regular withdrawal will automatically provide you with a passive income every month, that is, payout part of your assets.

The payout portfolio is intended for people who have already built up or acquired a certain amount of financial assets and now, have an opportunity to collect a meaningful pension from it.

In accordance with the Finax's philosophy, we offer you an efficient annuity portfolio in terms of revenues, fees and taxes that will allow you to further increase your assets even at the time of withdrawals. At the same time, we offer you the convenience of our user interface.

We will take care of virtually everything from setting up a suitable investment plan, where we take into consideration risk preference, investment horizon and your goals, to determining the maximum monthly withdrawal based on your preference, to also selling the investment part necessary for the withdrawal.

In this article we will focus mainly on explaining what regular withdrawal is, in which situations is it beneficial, what annuity opportunities have you had in Slovakia so far, how we designed the regular withdrawal in Finax, what are the reasons for this setup and what benefits our solution offers you.

In the second article, we describe how the Intelligent regular withdrawal works, how to open a regular withdrawal account, what to watch out for and how to set it up for your long-term satisfaction.

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What is the idea behind regular withdrawal?

Every investment consists of two phases: building of the assets and drawing the benefits from them. The second phase is mostly forgotten in Slovakia. Available solutions are very limited, especially in terms of risk, potential return, taxes, but also adaptation.

We have not heard of a product that fully capitalizes on the potential of investments and offers a truly effective solution to the regular withdrawal from financial assets.

This is the reason why we are introducing Intelligent regular withdrawal, which will be used when utilizing your assets, using the same principles on which the Intelligent Investing builds the assets, simply, clearly and without worries.

Whether you are investing for retirement, saving children for education or building assets for future passive income, you will come to the stage where you want to enjoy your investment. Otherwise, investing makes no sense. First of all, we want to fully experience life, not just live through it while saving.

Have you ever asked yourself what to do with your investments when you meet your goals or build sufficient assets?

Whether it is a case of retirement or passive income as an addition to wage, investors prefer regular withdrawals. None knows how much money he / she will need during the retirement or how long he / she will be dependent on the income from investment. Therefore, it is sensible to spread the withdrawal of the assets over a longer period of time.

Numerous studies, including the one from the Ministry of Finance of the Slovak Republic show that in the long term it is more profitable to continue with the investment while also receiving regular withdrawals.

First of all, it is important to consider whether a regular withdrawal is a suitable product for you. If you have sufficient income from your work or business, we recommend that you continue with the building of assets.

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What regular withdrawal options had been available?

The offers of payout investment products in Slovakia are not very attractive despite the fact that there are many options available. Each solution has its own advantages and disadvantages.

In the second pillar, a retirement saver buys a lifetime annuity from an insurance company. This annuity has a fixed amount regardless of the horizon. Insurers take the uncertain length of horizon into consideration and base the annuity on life expectancy statistics and a safe rate of return. As a result, the amount of annuity is considerably limited.

If you are not an outliner in terms of average retirement period, you will always lose on the annuity. Most pensioners will receive the annuity for a relatively long horizon during which the saved money could be further appreciated and thus offer a much larger pension

In case of the third pillar, pensioners receive benefits from payout funds that invest too conservatively, that is to say, to minimum yield government bonds. In addition, benefits are taxed (19% withholding tax).

Annuity products are also starting to appear in the offer of Slovak asset management companies, but with the shortcomings of bonds and mutual funds, such as low return, higher costs and taxation of profits.

For these reasons, Slovak annuitants prefer private corporate bond issues. These offer a desirable return, but they are associated with an extremely high risk, as recently pointed out by the National Bank of Slovakia. The risk is very concentrated and the returns do not match it. This is mainly the risk of default (credit risk). In addition, the revenues from coupon are taxed and they do not offer sufficient frequency (typically annual or semi-annual).

Real estate remains the most popular asset of annuitants. For a regular, not very creditworthy pensioner, they do not provide sufficient diversification, the risk is concentrated and very specific, the returns are lagging behind the appreciation of equity solutions, income is taxed and real estate require considerable administration and maintenance (time).

Dividend shares or funds based on this asset class tend to be used as a payout option. Their problem is again lower return and taxation. Dividend-paying firms operate in saturated industries that have achieved their peaked growth rates a long time ago. In addition, dividends are subject to taxation from 2017 onwards.

Neither of these alternatives offers an ideal annuity portfolio solution. Therefore, we want to offer you an effective tool for the period when you reach your goals, so that you can get the most out of your savings even after the active asset building phase.

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What is the ideal solution for a payout product?

In Finax, we also lean towards a diversified market-based solution based on global equities and bonds, as part of our annuity portfolio.

The main benefit is higher return compared to traditional annuity options. Many emerging annuitants have a horizon in order of several decades. That is a really long time to waste assets in a conservative solution and deprive yourself of high appreciation potential, higher income and better living standard.

Difference in investment result of 100 thousand EUR with 30 years’ investment horizon at 1% annual yield and at 5% annual is unbelievable 297 thousand. EUR. It plays an important role whether you will have 135 thousand EUR (1% p.a.) or 432 thousand EUR (5% p.a.) available for your retirement.

Taxes also reduce the income from the investment. As annuitants, we want to enjoy life and not waste time filing a tax return and paying taxes. Tax exemption after one year is a huge benefit of Intelligent regular withdrawal.

Another advantage is the unrivalled risk minimization. None of the above mentioned solutions offers such a spread of investment risk as Finax. Sufficient diversification is a key requirement for stable income over long horizons.

The only parameter of an Intelligent regular withdrawal that may discourage you is the fluctuation of the portfolio's value. The portfolio consists of traded assets, whose price is set daily on the stock exchange. However, it is a prevalent and irremovable risk of proper investment that can only be eliminated with sufficient time, reasonable withdrawals and diversification

Market risk is the price for higher appreciation. However, daily trading offers a valuable characteristic in form of immediate liquidity of assets.

For more information on how regular withdrawal works, how the investment questionnaire has changed, and how to set it up correctly, see the next article: How Intelligent Annuity Works. If you have any questions regarding the regular withdrawals, please do not hesitate to contact us.

Radoslav Kasík
Radoslav Kasík
Head of Sales Strategy
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