A retirement plan is only as robust as the accuracy of the underlying assumptions, and one of the most important assumptions to get right is the determination of post-retirement income. Here are some things to consider:
Retirement accommodation
Many retirees plan to downscale their residence at retirement with a view to both freeing up capital and securing more manageable accommodation that meets their retirement needs. However, a smaller home or retirement unit does not necessarily translate into reduced monthly expenditure. Rather than assuming that your accommodation costs will decrease, be sure to do your research and read the fine print.
Living in a sectional title unit means that you will need to budget for monthly levies and their year-on-year increases. Levies, which are set annually by the body corporate, are designed to cover all expenses encountered by the body corporate during a financial year. These can include the maintenance of communal roads, gardens, and swimming pools, as well as cleaning services, security, staff salaries, insurance, rates, and taxes. It goes without saying that complexes offering higher-end facilities such as clubhouses, jacuzzies, gyms, tennis courts, and libraries will carry greater ongoing expenses and therefore attract higher levies.
On the other hand, bear in mind that the monthly levies and administration costs of life rights schemes are generally lower than those of sectional title units. Developers of life rights schemes are also required to provide a two-year cost estimate in respect of levies, making it easier to budget ahead. As a result, life rights owners can expect to enjoy more predictable, and often lower, monthly levies.
If you intend to downscale to a freestanding property, remember that your municipal rates, taxes, water, and electricity charges will remain fixed line items in your budget. The rising cost of energy needs to be carefully factored into your planning. Security is another significant and often underestimated expense, particularly if you intend to live in a freehold property. You’ll need to account for the cost of installing, maintaining, and upgrading home security systems.
As you age and potentially become less physically mobile, you may also find yourself spending more on domestic support. This could include additional help with housework, laundry, and general cleaning, as well as outsourced garden services, pet grooming, pool maintenance, and bin cleaning. These lifestyle services can become increasingly necessary and should be included in your retirement cost projections.
Entertainment, exercise and travel
With more time on your hands, it is natural to expect an increase in expenditure on entertainment, local travel, subscriptions, and membership fees. In the years leading up to retirement, you will likely begin to develop a clearer sense of the hobbies and recreational activities you’d like to pursue in retirement. Use this time to research the costs involved and build a realistic, flexible budget.
These costs could include gym membership fees, sports club subscriptions, hobby or craft groups, book clubs, bridge clubs, or hiking and walking associations. If you plan to take up or continue creative or intellectual pursuits, factor in the cost of lessons, online courses, or tuition for skills such as photography, computing, painting, or learning a new language.
Remaining mentally and physically engaged during retirement is key to overall well-being, and local travel often plays an important part in this. Weekend getaways, day trips, scenic drives, or holidays within the country should all be budgeted for. Be sure to include the full cost of owning and running a reliable vehicle, including fuel, maintenance, licensing, and insurance.
Capital outlays
In determining your required retirement income, don’t neglect to account for the capital outlays you may face throughout your retirement years. If you have adult children living overseas, budgeting for overseas travel, particularly in the earlier years of retirement, while you are still physically capable of long-distance travel, is important. However, be warned that travel expenses are easy to underestimate, so it’s wise to build a buffer into your budget.
In today’s digitally connected world, remaining online and engaged is increasingly important for retirees, many of whom can feel overwhelmed or excluded by rapidly evolving technology. Given the high cost of technology, including hardware such as smartphones, tablets, and laptops, it’s important to budget not only for capital purchases but also for recurring monthly expenses. These may include Wi-Fi, data, antivirus software, streaming services, cloud storage, and licensing fees.
Additional capital outlays may include helping children or grandchildren financially, for example, contributing to wedding expenses, paying for graduation gifts, assisting with tertiary education costs, or helping adult children with a deposit for their first property. To ensure that your retirement plan accommodates these potential expenses, draw up a list of capital items you are realistically likely to face and build them into your retirement projections.
Healthcare costs
We all know that healthcare inflation runs approximately 4% higher than consumer inflation, meaning that your medical aid premiums are likely to increase as a proportion of your monthly expenditure over time. Further, as you age and encounter more serious health challenges, you will likely need to migrate to a more comprehensive medical aid option, which, of course, comes at a higher premium.
When projecting your future medical costs, it is therefore advisable to budget for annual increases of inflation plus 4% at a minimum. This should include your gap cover premiums if applicable. That said, even the most comprehensive medical aid option is unlikely to cover all your healthcare expenses. While these costs can be difficult to estimate in advance, it is possible to research typical healthcare costs for the elderly.
Medical appliances, hearing aids, spectacles and visual aids, prosthetics, walkers, wheelchairs, and other mobility aids can be prohibitively expensive. It is not unreasonable to expect to face one or more of these expenses as you age. Other costs worth considering include the cost of home renovations or vehicle modifications to improve accessibility and safety if you become less mobile.
Elderly care
Some of the most challenging and emotionally fraught costs to prepare for are those associated with assisted living, frail care, or home-based nursing. The longer you live, the higher your risk of requiring some form of long-term care becomes, and these services often come at great financial cost.
Your retirement plan must be structured to accommodate this potential outcome. It’s important to bear in mind that your monthly annuity income may not be sufficient to cover the costs of frail care or in-home nursing. In such cases, you may need to rely on discretionary funds, so the structure and balance between your compulsory and discretionary savings become crucial.
Establishing the correct balance and carefully timing your withdrawals from various retirement vehicles is essential for building a resilient, sustainable retirement plan. By factoring in the full spectrum of possible expenses – from accommodation to healthcare and capital outlays – you will be better prepared to navigate the financial realities of retirement with confidence.
Have a great day.
Sue
