If you’re planning to retire in your 60s, the decade before is a critical one when it comes to planning for and structuring your retirement savings. With less time to correct your financial miscalculations, the decade leading up to formal retirement should be used to consolidate your retirement investments and create a more crystalised picture of what retirement looks like to you. From our experience, these are the most common financial mistakes made by those in their fifties.
Thinking it’s too late: If you’re underfunded for the retirement you hope to achieve, the worst thing you can do is to give up. Remember, it is never too late to start closing the gap. While your investment horizon may be less than ideal, you may find several factors working in your favour. Being generally the highest income earning decade, one’s fifties is also a time when a number of expenses – such as bond and vehicle repayments, life cover, and tertiary education fees – start decreasing. Further, unlike the tough years of servicing a full bond, raising children and building a career, one’s fifties are generally less frenetic and financially taxing. With more time on your hands to pay attention to your finances, now is the time to have a baseline financial plan drafted so that you have a clear picture of your current financial position.
Not having a plan for retirement: Hope is not a strategy, so now is the time to have a realistic retirement plan developed that is built around your unique vision for retirement. Being within reach, it is now time to add detail to your broad strokes retirement picture in terms of where you intend to live, your travel and adventure goals, how and where you plan to spend your time, your charitable and philanthropic goals, and your care plans for later on in life. In developing your retirement plan, be sure to give thought to where your adult children live, what your support system will look like, what your healthcare requirements may be later in retirement, and how close you will live to amenities such as clinics, hospitals, libraries and shopping centres. Besides providing peace of mind, having a roadmap in place to achieve your retirement objectives will help you prioritise the financial steps needed to bring the plan to fruition.
Not making plans for your retirement accommodation: Although there has been massive growth in retirement accommodation facilities, demand for affordable, comfortable retirement accommodation with care facilities still outstrips. If you plan to purchase a unit in a retirement village or complex, now is the time to start doing your research and putting your name on waiting lists.
Making poor money decisions: It goes without saying that it’s easier to bounce back from poor money decisions made in your 20s than from those made in your 50s. With the benefits of time, financial mistakes made early in your career can be rectified – but the same is not necessarily true for those made in the years preceding retirement. If you don’t already have a trusted financial advisor, now is the time to come alongside a financial planning expert whose advice you trust and whom you can use as a sounding board for your financial decisions going forward.
Not reviewing your life cover: As you accumulate wealth and your children become less dependent on you financially, you may find that your need for life cover reduces which means that now is a good time to review the long-term insurance that you have in place. Before reducing or cancelling any life cover, however, give careful thought to the liquidity needs in your estate. Re-applying for life cover in your fifties can be a costly exercise so avoid cancelling any cover until you’ve had a comprehensive estate plan prepared. If there is an opportunity to reduce your long-term insurance contributions, consider redirecting those premiums towards your retirement funding.
Not attacking your debt: Ideally, you will want to ensure that all debt is paid off before you retire and your 50s are an excellent time to aggressively attack your debt. While you may only wish to retire sometime after age 65, bear in mind that illness, retrenchments and economic downturns can scupper your plans. While you are earning and have extra disposable income, commit to eliminating your debt as soon as possible.
Accessing your retirement savings: When you reach age 55 you are able to access up to one-third of the funds invested in your retirement annuities – something that many in their fifties are tempted to do. However, besides for the potential tax implications of withdrawing funds from an RA, bear in mind that any withdrawals will interrupt the power of compounding and subsequent investment growth. That said, there may be strategically sound reasons for withdrawing from your retirement annuity and it is best to consider your options in the context of your overall portfolio.
Investing too conservatively: With 10 or more years until formal retirement and possibly another 30 years in retirement, you potentially have a long investment timeline ahead of you. Prematurely moving your invested assets into a more conservative portfolio could result in your investments not keeping pace with inflation which in turn will decrease the purchasing power of your capital over time. On the other hand, being too aggressive with your money can expose your money to unnecessarily high risks without sufficient time to recover from potential losses. Your fifties are an appropriate time to seek expert advice on the structuring of your overall investment portfolio to ensure a balance between investment risk and rewards against the backdrop of your retirement objectives is achieved.
Not having access to discretionary funds: Having all your money invested in compulsory funds, such as pension, provident and retirement annuity funds, can result in cashflow problems later in retirement. Once you have converted your retirement funds into a life annuity, living annuity or a combination of the two, keep in mind that you will not be able to make lump sum withdrawals and it is, therefore, important to plan for your capital expenditure and/or emergency funding needs during your retirement years. Before formally retiring from any funds, it is important to have a retirement cash flow analysis prepared so that you fully understand your retirement income needs going forward and plan strategically to ensure no liquidity problems arise.
Retiring too early: An early retirement and a life of permanent leisure may sound idyllic, but many early retirees attest to suffering from boredom, depression, lack of purpose, disengagement and unfulfillment. Besides the emotional and psychological effects of retiring too soon, you also need to consider that if you retire at age 65 and live to age 95, you will spend 30 years in retirement. Retiring to escape a job you hate is not a sound strategy. Spend time with your retirement planner exploring alternatives such as delaying retirement, changing careers, negotiating a transitioned retirement, or working reduced hours. You may also want to consider taking a sabbatical from work to experience what retired life would look and feel like. You may be surprised by the results!
Leaving your estate planning to chance: As mentioned above, life insurance – if correctly structured – can be used strategically to achieve your estate planning objectives, and it is advisable to develop an estate plan to ensure that there are enough liquid assets in your estate to cover administration costs, taxes and other liabilities. Similarly, living annuities can be used to provide for your loved ones following your death, keeping in mind that funds held in a living annuity structure do not form part of your deceased estate and will therefore not be subject to estate administration. As such, decisions pertaining to your life cover and the selection of an appropriate annuity income should be taken in the context of your broader estate planning goals.
Falling for scams: If you’re underfunded for retirement, it’s only natural for fear and panic to set it. Unfortunately, these two emotions, when experienced together in the context of money, can lead investors to make unwise investment choices such as falling for get-rich-quick investment schemes. Fraudulent investment schemes are becoming more and more sophisticated and difficult to identify, so stay guarded at all times. Regular meetings with your trusted financial advisor should protect you from making panicked decisions.
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