Planning for retirement is a fundamental part of your personal financial plan and should be a long-term goal. In order to ensure you have the funds you need when you reach retirement age, there are a few essentials to consider.
There’s a high possibility that you will need a lot more money when you retire than you do now, and if your investments are not growing at more than the rate of inflation, your savings’ purchasing power will be eroded and you won’t have enough in your portfolio to keep up with essential costs. Start by drawing up a retirement budget. Know your expenses now and what you can put away. Have a clear idea of your future expenses and what you will need on a monthly basis - the general rule of thumb is that you’ll need to be able to replace 75% of your income to retire comfortably. Keep in mind that medical aid is likely to increase and consider the costs of frail care or assisted living.
Today’s financial markets are increasingly volatile and can put a real damper on years of diligent retirement planning. The single most important thing you can do to mitigate risk is to diversify your portfolio. “The principle of diversification is that when one asset in your portfolio drops in value, another one rises, thereby smoothing the peaks and troughs in your portfolio,” says Anthony Palmer, Group Commercial Director at Carrick. “Spreading your investment across asset classes, geographies, currencies and industries is one of the few time-tested strategies for investors with long-term financial goals.” No matter where you invest, you need to be in it for the long-term allowing enough time for your money to grow.
It’s a fact that life spans are increasing. If you started saving 40 years ago, very old age may not have been a consideration in your financial planning. Today it’s possible that you could live into your 90s, so individuals at age 65 are probably looking at spending 20 years or more in retirement – in fact some people may spend a longer time in retirement than they did working. Consider your post-retirement income sources. Do you have a property to let? Are you able to use your expertise and experience to continue to earn some income?
Your withdrawal strategy – which is the rate at which you draw down savings and investment assets to pay for current living expenses in retirement, directly impacts how long your savings will last. Wealth preservation becomes especially important when you’re in drawdown, says Palmer. “If the percentage drawdown is too high, your money will run out. Access and tax are also important considerations when it comes to retirement income and necessitates looking at other assets outside of the pension system. It’s always a good idea to draw down on these first as they are on your balance sheet for estate duty whereas pension assets are not.” Also, consider liquidity – it’s always a good idea to keep some money in your own name or in a structure that can be easily accessed in cash of emergencies, advises Palmer, as you can only draw a pension income from your living annuity of between 2.5% and a maximum of 17.5% a year, based on the value of the capital.
Asset liability match
A question we are commonly asked is how much of persons savings should be invested offshore. The reality is that if your expenses are in rands, you need to have a sufficient rand asset base to generate income to cover these expenses. Once you have that in place, you can then decide where to invest the balance. “We normally break retirement plans into three buckets,” explains Palmer. Bucket one is the low-risk income bucket providing 24 months of drawdown. Bucket two is the core holding of a balanced portfolio and bucket three is 100% equity holding (offshore and/or onshore) and higher risk. You always draw from bucket one which is topped up as and when needed from bucket two. Bucket three needs oxygen to breathe and will be more volatile but gives investors a better chance of meeting their retirement goals over the longer term.
“The reality is most people have insufficient funds to maintain their current lifestyle in retirement. In this situation you’re required to take on more risk to sustain yourself, even though you don’t want to because of where you are in your life cycle. .”
Update your policies
Ensure the beneficiaries on your policies are up to date, advises Palmer. In addition to ensuring that the right people receive any pay-outs, as your pension money falls outside of your will, your list of nominated beneficiaries will take preference as far as your pension money is concerned, regardless of other provisions in your will. It’s also more likely that the money will be released quicker.
Finally, if there’s one thing that everyone agrees on – it’s never too late to start saving for retirement. That means you also need to get out of the debt trap - you don’t want to be paying off loans or credit card debt in your later years. As Carrick General Manager Anton Schoeman says: “Don’t have more life left at the end of your money, rather more money at the end of your life.”
“The reality is most people have insufficient funds to maintain their current lifestyle in retirement. In this situation you’re required to take on more risk to sustain yourself, even though you don’t want to because of where you are in your life cycle.”