Many people aim to retire at the age of 60 in the hopes that they’ll still be fit and healthy enough to enjoy an active retirement. While there’s a lot to be said for retiring early, it’s important to keep in mind the potentially extensive retirement period you will need to fund for, and the multitude of eventualities you could be faced with over what could well be a period of 40 years. Here are six things to consider before retiring.
Your post-retirement income
When it comes to determining an appropriate retirement income, our advice is avoid using rules of thumbs. Every retiree faces a unique set of circumstances which need to be closely examined before arriving at a retirement income that is best aligned with their needs. While many expenses, such as bond repayments and retirement funding contributions, fall away at retirement, it is important to consider in careful detail the additional expenses you could be faced with in your retirement years. The rising costs of healthcare as one ages are well-document, there are other important factors which can drive up your post-retirement expenditure. For instance, if you have adult children living abroad, the costs of international travel would need to be factored into your budget, keeping in mind that such expenditure would be of a capital nature and will likely not be funded from your annuity income. Further, assuming that an active retirement is important to you, you will need to budget for the costs of the interests, hobbies and sports you plan to engage in, as there’s no point realising after retirement that you don’t have enough money for these things.
Your sources of retirement income
The next consideration is to take stock of the investments you have earmarked for retirement and to fully understand their mechanics. In doing so, you should take into account when you are able to access the funds, how much you can withdraw in cash, the specific rules relating to each investment, your options at retirement, and how you will be taxed. The pension fund industry is highly regulated and complex, and there are a number of critical decisions that need to be taken expeditiously and in the right sequence in order to avoid making costly mistakes. Understanding where and how you are invested in the year leading up to retirement is critical to ensuring that your investment strategy supports your retirement timeline, keeping in mind that you may need to make adjustments to your investment strategy in order to meet your stated objectives. Most pre-retirees have a blend of retirement funds and discretionary investments in place at retirement, and understanding how these investments will be taxed is key to developing a workable strategy. Remember, many of the decisions you will make at retirement are once-in-a-lifetime, irreversible decisions that you simply cannot afford to get wrong. No single investment should be considered in isolation from another, so find an advisor who is able to take a holistic view of your entire portfolio with a view to providing retirement, tax and estate planning advice that wholly supports your goals.
The transition from earning an income to drawing an income requires a massive psychological shift and, while you may be tempted to take a more conservative investment approach with a view to preserving your capital, beware of investing too conservatively for your timeline – bearing in mind that you have a potential 40-year timeline which by investment standards is considered long-term. Exposing your retirement nest egg to higher risk investments will increase the probability that the value of your wealth in real terms will keep pace with – and ideally outstrip – inflation, meaning that your invested capital will continue to grow over time even though you are drawing from it. If your capital is too heavily weighted towards cash and bonds, you may struggle to achieve sufficient investment returns to keep pace with the costs of living which, in turn, can results in liquidity problems later on in retirement. While short-term market fluctuations can cause some discomfort and unease, don’t lose sight of your timeline and the long-term nature of your overall plan.
Whether you can afford to retire
Once you’ve determined an appropriate retirement income, the next step is to figure out if you have sufficient invested capital to provide for this income. This process – ideally navigated together with an independent retirement advisor – should involve the development of a number of retirement scenarios using a stress-tested set of assumptions, including assumptions relating to your life expectancy, investment returns, inflation, medical inflation, and potential capital outlays. Understanding the potential expenses you may be faced with at various stages during your retirement is key to developing realistic scenarios. For example, one could reasonably expect to spend more on travel during the first decade of your retirement with these costs reducing as you grow older and lose mobility; while on the other hand, your healthcare care costs are likely to escalate more quickly in the last decade of your life. This means that it is not only important to get your drawdown levels right but also to plan for the possibility of capital outlays during retirement, such as paying for a wedding, purchasing a life rights unit, or funding the costs of home renovations or modifications.
While an early retirement may sound idyllic, give careful thought as to how you will fill your day, every day, potentially for the next 40 years. Switching from a busy, purpose-driven schedule to a blank diary may sound appealing, but the reality of finding enough to keep you busy all day, every day can be daunting. Further, lack of purpose may not only lead to boredom, but can also affect one’s self-worth and identity. Depending on your experience, qualifications and industry, you may find it difficult to re-enter the workforce after having retired, so you need to be absolutely sure that a life with no work commitments is exactly what you want. If you’ve been gainfully employed up until retirement, your professional persona will be an integral part of who you are, and many retirees struggle with the loss of their professional identify, not to mention the engagement with their peers and workplace comradery.
If you’re retiring at a relatively young age, it’s possible that the family home is still adequate for your needs and that you are physically able to attend to its maintenance and upkeep. Realistically, however, your retirement accommodation needs are likely to change as you transition through the various stages of your retirement. With the high cost of decent retirement accommodation -coupled with long waiting lists – it is advisable to begin thinking about your future retirement accommodation sooner rather than later. Retirement villages – many structured on the basis of life rights – have gained massively in popularity over the past few years, largely because of their convenience and favourable cost structures. With high crime rates, many retirees find comfort in the safety and security offered by such developments – and naturally access to assisted living and frail care remains a major draw card, although these facilities come at a price which, if not budgeted for in the pre-retirement planning phase are likely to be unaffordable to the average retiree. Most retirees fear becoming a financial or physical burden to their adult children, but the reality is that if you haven’t budgeted for a realistic long-term healthcare plan, living with and/or being cared for by your adult children may be your only option. If the equity (or part thereof) in your primary residence is required for your retirement funding, the timing of the sale of the asset is another important decision to get right. As with investment markets, property markets fluctuate over time and will to a large extent determine the value you can extract from the asset. Many retirees make the mistake of holding onto their family home longer than is necessary for sentimental reasons which can result in a poorly-time sale and a reduced retirement nest egg.
As is evident from the above, retirement planning is multi-faceted and all-encompassing and should be undertaken with the guidance of a retirement planning expert to ensure that decisions are made timeously, sequentially and appropriately.
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