Historical retirement planning meant only one thing; saving and investing every last cent and then living off this nest egg and hoping that you passed on before the capital was exhausted. Potential retirees in the 21st century require a more thoughtful and innovative approach that’s personally tailored to their circumstances; aligning spending expectations with sources of income, longevity risks and lifestyle choices.
Here are some questions for you to consider when planning for a retirement lifestyle.
What retirement lifestyle do I desire?
The amount of income you require is based on numerous lifestyle related factors, it’s very much a moving target. These factors include;
- For how long do you expect to live?
- What is your current state of health?
- How much do you want to travel?
- Will you be earning an income during this time?
- Where do you want to live and many more?
For couples, this may require conversations long into the night and often needs compromise over priorities and tradeoffs between objectives. It is a common fact in the Western World that longevity is on the increase and retirees today are much more active than their predecessors. Living to 100 or getting close is becoming more and more common. However, it also costs far more to stay healthy and active and visiting friends and family around the world does not come cheap.
How much will this lifestyle cost me?
The first things to plan around are what the basic necessary living costs will amount to, these will include a roof over your head, food and healthcare. Then you need to consider the things that you would like to do. It is advisable to list these wants, their estimated cost, and then rank them in order of priority. Many people call this a “bucket list”.
Many retirees overestimate how much they can afford to spend in their early years of retirement and run the serious risk of costs running ahead of investment returns. An important factor to bear in mind is the ravaging effects of inflation. Over time this is the silent killer of an investment portfolio that is overly conservative.
What strategies can help me?
Retirees should adopt a strategy that is personally tailored to their appetite for risk, retirement expectations and amount of capital available. Tax is also a vitally important factor to take into account. Having tax efficient investment growth and tax efficient income drawdowns, can be a major positive contributor to increasing the ability of a capital sum to fund retirement.
Asset allocation and diversification will reduce the risk of the portfolio and ensure that it is capable of withstanding volatile economic conditions. Greed and fear are the two most common attributes that retirees need to avoid when structuring their retirement capital and formulating their investment strategy.
How should I drawdown on my asset base?
The ideal scenario is that retirees should consider generating some form of consulting income in the early retirement years, i.e. reduce the need to immediately draw down on the asset base. This allows the capital to accumulate and can add many years to the life span of this capital. Most people retire in fairly good health with a wealth of skills and wisdom that is much in demand, cashing in on this is an excellent strategy for the first couple of years of retirement.
Thereafter, a strategy of funding retirement from a number of income sources is often most efficient. This could mean receiving your annual required income from a blend of living annuity drawdowns, interest, dividends and some capital realization. The best strategy is to view all your retirement capital as one big pot, and in some years you may draw differing amounts from different aspects of this pot, and as long as this pot grows in line with the plan, it will be well placed to feed you adequately over the years.
How should I treat my retirement annuities and pension funds, lump sums or annuities?
The immediate dilemma on retirement is what amount to take from retirement annuities and pension funds as a lump sum and what amounts to commute to an annuity. The tax laws in South Africa as pertaining to retirement funds have been the subject of recent changes and the effect has been to align the tax treatment of retirement annuities, pension funds and provident funds.
Tax effects are normally the major drivers in this decision. To the extent that a tax break is received, a lump sum should be taken, with the balance of the retirement funds commuted to a living annuity. Living annuities are extremely flexible in terms of draw down percentages, and these can be adjusted annually.
Next week’s article will consider an additional five questions and appropriate strategies that should be considered when implementing a retirement strategy. Retirement only happens once, there is no second innings to come back to and it is fundamentally important that retirees take proper advice from quality experienced advisors. Don’t hesitate to take give Tony a call should you wish to discuss a retirement plan and strategy.