What are the financial considerations upon reaching retirement?

As you near retirement, two questions will likely occupy your thoughts: “how do I manage my time” and “how do I manage my finances”.

This article offers some guidance for the latter and suggests some key principles to consider in order to secure a financially comfortable retirement, which ultimately depends on whether enough money has been saved to support the type of lifestyle you would like to lead. 

1. Make a plan

The best place to start is with pen and paper, and some introspection, to plan the future. This will force you to identify and confront the beckoning issues. The plan should clearly set out goals, and details about how these will be funded. The primary goal will be to maintain an acceptable lifestyle, covering accommodation, food, healthcare, transport, communication and entertainment, which will require a steady income stream. You will probably have to draw up a detailed budget to get a sense of what this lifestyle will cost, and how much money is needed to fund it for an indefinite period.

Beyond that, you may have aspirations about travel, recreation and personal development that necessitate periodic outlays, and need to access the required funds at short notice, but only at a future date. Furthermore, you will want ready access to funds to meet unexpected emergencies and capital purchases.

Each of these objectives has a different time horizon, which should instruct how your retirement savings will be apportioned and invested. Normal living expenses can last for decades, which means that the savings should be invested with a long-term perspective, however emergencies do happen unexpectedly, and you wouldn’t want to expose this money to short term risks.

During pre-retirement years it was in your hands to build a savings pot commensurate to the lifestyle desired in retirement, but once retirement age is reached, you need to deal with what you have, which may mean adjusting your lifestyle to what the savings will afford. 

2. Manage your retirement fund proceeds

Members of pension or RA funds are not permitted to take more than one-third of proceeds as a cash lump sum (unless the fund value is less than R247 500), and are required to purchase an annuity with the balance. With a provident fund, you have the option to claim the full proceeds as a lump sum.

Cash lump sums confer certain tax advantages, with no tax is charged on the first R500 000. While this option is tempting, remember that the intended purpose of your retirement fund is to provide you with adequate income throughout your retirement years. It is not to pay off your debt, buy a new car, start a business or finance a long holiday. The cash lump sum will reduce the amount available to purchase an annuity, and as a result lower the monthly income received for the rest of your life. If you lack the discipline or financial acumen to deal prudently with your cash lump sum, you should consider taking less than one-third as cash. 

3. Choose your annuity

Choosing an annuity (either a living or a life annuity) requires careful evaluation of your specific needs and circumstances, so you should use an appropriate retirement planning tool.

With a guaranteed annuity, the insurer pays you a specified monthly pension for the rest of your life. This insures you against the risk that you live longer than expected or depleting your capital too soon due to poor investment returns. The drawback is that your capital dies with you, and no money is passed onto your heirs.

There is no standard guaranteed annuity, so you need to choose the one that is right for you. Your income will depend on the type of annuity you choose, and also on your annuity provider. You should therefore shop around for the best available rate at the time.

A living annuity offers greater investment and income flexibility and your heirs inherit any capital that is left after your death. On the flip side, you carry the risk and responsibility of securing an adequate income for life. You are effectively in charge of your retirement savings, and the decisions made will determine the level and sustainability of your pension and lifestyle. If uninformed decisions are made you may stand the risk of outliving your savings. 

4. Manage your discretionary savings

If provident funds are claimed as a lump sum, and/or you have gathered a substantial amount of non-retirement savings, you will still be left with the same problem: how to manage this money so that it works optimally for you.

You may think that the safest and simplest bet is to put your money into a savings account and live off the interest. The interest income will however not grow with inflation, and the purchasing power of both the interest income and the underlying capital will decline over time. You will also not receive a consistent income as interest rates fluctuate.

One if the most important aspects to consider is your time horizon. If you anticipate some big near-term expenses then it does make sense to “preserve” some of this money in a savings account. If you plan to draw a regular income from these savings over ten or twenty years you will then need to invest the balance with a long-term perspective to achieve inflation-beating growth.

This means you have to put some money in the share market, which is the most reliable way to grow wealth, and by doing so will most likely sustain the required income for longer. The simplest way is to invest in a low cost, balanced (multi-asset) unit trust fund. This does not just facilitate monthly contributions, but also monthly withdrawals, giving you the benefit of both a low cost growth portfolio, as well as a regular income.

Steven Nathan is the CEO of 10X Investments.

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