How to prepare for retirement

While retirement may be a one-off event, getting your retirement right takes careful, meticulous planning in the years leading up to the event to ensure that your retirement years are what you envisage them to be. Many pre-retirees attest to feeling particularly anxious and doubtful in the months leading up to retirement as they begin second-guessing their decisions and retirement plans. The mental shift from generating an income to drawing from your life’s savings plays heavily on the mind of most pre-retirees who are most likely acutely aware that the financial decisions leading up to retirement are all-important – and very often irreversible. If retirement is on your dashboard, here are some tips on how to prepare adequately for this life stage.

Consider a retirement trial run

The retirement lifestyle that you have in mind may be practically very different from the vision, so consider trial running your retirement – even if it’s for shorter periods of time – particularly if you plan on completely relocating to another city or town. Although the idea of retiring to a sleepy village or quiet beach town may be appealing, the practical reality of living there permanently, particularly through the off-season, may not be in line with your vision. To ensure the lifestyle is what you’re looking for, spend a few months trial running your retirement in the destination of your choice. Many clients who have undertaken this exercise have uncovered some surprising discoveries which, in turn, have served to completely reinvent their concept of retirement.

Think about your retirement accommodation

If you’re not planning to relocate, give careful thought about the type of retirement accommodation you envisage for yourself. Do you want to sell your primary residence and purchase a smaller, more manageable freestanding home? Could you see yourself living in a life rights retirement village? If you have travel plans, is a lock-up-and-go townhouse a better option? Do you have plans to ultimately live with your adult children, and what do these plans look like? Buying and selling property is expensive, and any unnecessary property transactions just before or during your retirement years can negatively impact your retirement funding position. Spend time doing your research, reading retirement material, and visiting retirement villages so that you get a clear picture of the options available to you.

Refine your post-retirement budget

As you get closer to retirement, start refining what your post-retirement budget will look like. Setting a realistic and achievable budget is vital to ensure that your cashflow is meets your lifestyle needs and is sustainable into the future. When contemplating your post-retirement expenses, give thought to the following:

  • Your hobbies and interests: With more time on your hands to engage in your hobbies and interests, be sure to build the costs of these into your budget. Being able to afford the things that you enjoy most is key to a rewarding retirement.
  • Entertainment: It is inevitable that during retirement you will have more time to relax and enjoy entertainment, which makes incorporating realistic entertainment expenditure an important part of your budget,
  • Your travel and holiday goals: Similarly, if travel is an integral part of your retirement plan, be sure to make allowances for these costs. While it may be easy to set aside a monthly amount for local travel, keep in mind that budgeting for the cost of overseas travel will need to be carefully planned for in terms of future cashflow.
  • Levies: If you’re planning on living in a townhouse complex or life rights retirement village, ensure that you include a realistic line item for levies. While life rights levies are easier to budget for, be sure to get a feel for the levy increases you could reasonably expect to pay in a townhouse complex, and then plan accordingly.
  • Healthcare: Medical aid costs generally outstrip inflation year-on-year by about 3% or 4%, so be sure to budget realistically for your post-retirement healthcare costs, keeping in mind that many diseases and chronic conditions are linked to the aging process – meaning the longer you live, the greater the likelihood of your health being compromised in some form or other.
Consider potential capital outflows

Once you’ve given thought to your monthly budget, you will want to give consideration to any large capital outflows that you envisage during your retirement years. While your annuity income may be sufficient to cover your monthly living costs, you will need to be careful when planning for larger, one-off expenses such as paying for a wedding, purchasing a new vehicle, taking an overseas trip, or making a financial gift or donation to a child or grandchild. It is likely that these costs will need to be funded from discretionary money, which means that the availability of these funds and the timing of your planned drawings will impact on how and where these funds are invested.

Check your emergency funding

While developing a strategy for your discretionary investments, keep in mind that your emergency funding forms a critical component of your portfolio. There is no one-size-fits all when it comes to setting up an emergency fund, so be sure to take into account your specific needs. Personal circumstances that you may want to take into account when considering your emergency fund include the age of your vehicles and whether they are still under motor plan, whether you have pets and pet insurance, how comprehensive your short-term insurance cover is, whether you have gap cover in place, the level of your medical savings account, and how comprehensive your medical aid plan is.

Plan for ill-health

Frail care, assisted living, and home nursing costs can be prohibitively expensive, and these are expenses that you need to give serious thought to before retirement. While you may be in relatively good health in the years leading up to retirement, this may not always be the case – and it is prudent to plan for a time when you may be physically or mentally incapacitated and in need of care. It is not only important to consider the costs of care, but also the proximity to medical facilities and the availability of care facilities. As such, it may be wise to put your name down at a number of frail care facilities so that if there comes a time that you require care, you have options available to you.

Life after retirement

The transition from full-time work or employment to full-time retirement is a notoriously difficult one, with boredom, lack of fulfillment, and depression being common amongst retirees. Be realistic about what a ‘day in the life’ of your retirement will look like, how you will fill your day, how you will keep mentally and physically active, and how you will remain socially engaged. An interesting exercise will be to take a daily planner and then fill in the blanks so that you can get a feel for what a typical retirement will look like, and whether it will work for you. If you’re older than your spouse and planning on retiring before her, consider how this will affect you. If your spouse intends continuing work, think carefully about how you will deal with being alone most of the day, and how you will remain connected with other people.

Understand financial decisions that need to be made

Lastly, and very importantly, you will need to understand the multiple financial decisions that need to be made as part of the retirement process. Firstly, when you reach formal retirement age, there may be risk cover – such as disability and/or dread disease cover – that falls away, and it is important to understand the effects of this on your planning. You will need to make decisions regarding your compulsory retirement funds, whether to make a withdrawal, whether to purchase a life or living annuity, and what draw down rate would be appropriate for your needs. If investing in a living annuity, you will need to understand your propensity for investment risk, and what returns you need to achieve to achieve your goals.

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