For those who are planning to retire in their 60s, your 50s is the decade where your retirement picture starts to look a little clearer. Having spent thirty or so years accumulating your wealth, this decade is an important one when it comes to fleshing out the details of what retirement looks like for you. With only a few years left before retirement, now is not the time to make financial errors of judgement. Here are some financial mistakes to avoid in this all-important decade:
Thinking it’s too late to build wealth
If your retirement funding isn’t where it should be by the time you enter your 50s, it’s easy to fall into the trap of believing it’s too late to start working on your retirement funding. However, nothing could be further from the truth – especially as one’s 50s are typically the highest income-earning decade. Quantifying your retirement funding deficit is a good place to start as this will help you understand what you are working towards. Once you know how much you still need to save for a comfortable retirement, you can start considering your available options which may include delaying retirement (working longer), spending less, saving more, investing more aggressively or a combination of all four.
Not having a Will
Dying without a Will can cause untold chaos and confusion for your loved ones who are likely to be left with questions and doubts around your intentions and final wishes. Having spent decades building your wealth, it makes sense to formally document how you want your assets distributed when you pass on. At the same time, consider signing a Living Will or Advance Healthcare Directive – both of which are designed to provide your family with guidance in the event of a medical emergency or where you cannot express your wishes in respect of medical treatment.
Not drafting an estate plan
Your financial advisor should be able to structure an estate plan for you which, in conjunction with your Will, will ensure that your wealth is transferred in such a way that your beneficiaries receive maximum benefit. Through effective estate planning, you can ensure liquidity in your estate, reduce tax and estate duties, account for offshore assets, and appoint heirs and legatees.
Making bad money decisions
It is easier to overcome bad money decisions made in your 20s than 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 professional, fee-based advisor, now is the perfect time to come alongside an expert whose advice you trust and who you can use as a sounding board for your financial decisions.
Not developing a retirement plan
There is more to a retirement plan than finances. A well-constructed retirement plan should take into consideration factors such as where you want to live, what retirement looks like for you, what type of support system you will have, where your adult children will be living, your health status, your travel goals, your bucket list, your philanthropic goals and how you want to spend your spare time. When you reach your 50s, you will inevitably have a clearer picture of what retirement will look like and it is during this decade that you can start tweaking the picture and fleshing out the details.
Being too conservative with your investments
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 and your investments will, therefore, need to earn strong returns. 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. Finding the balance between risk and reward against the backdrop of your retirement goals is critical at this life stage.
Not reviewing your life insurance
In general, the need for life cover reduces at this life stage and a review of your life insurance will determine whether you are over-insured and/or paying unnecessary premiums. As your adult children become financially independent and your net wealth grows, you may find that you can reduce your life cover to a certain extent. Any premiums saved on unnecessary insurance cover can be redirected towards your retirement funding.
Dipping into your retirement funds
If you are contributing towards a retirement fund, think carefully before accessing your invested capital when you reach age 55. Besides the tax consequences of withdrawing from your fund, taking out your money will interrupt the power of compounding. If possible, leave your funds invested for as long as possible without dipping into them to allow maximum investment growth to be achieved.
Upgrading your lifestyle too much
With your adult children becoming financially independent and your home loan reducing, having extra disposable income may tempt you to upgrade your lifestyle. Setting aside money to renovate your home or enjoy overseas travel is great but be sure to channel some of your extra cash towards extra retirement savings. Healthcare costs in retirement, specifically frail care and home nursing, can never be underestimated.
Retiring too soon
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 55 your money may need to last another 40 years. Depending on your profession, you may find re-entering the workplace in your late 50s somewhat challenging. As an alternative to early retirement, consider working reduced hours, negotiating a flexible work contract, or adopting a slower transition into formal retirement.
Planning to retire to your favourite holiday destination
Over the festive season, your favourite holiday destination is likely abuzz with activity and flooded with family and close friends, making it seem like the perfect retirement destination. But, before buying a retirement home in your favourite holiday town, spend time there during the week in the off-season. Without family, friends and holiday cheer, can you really see yourself living there day-in and day-out? How will you occupy your days? When will you see your loved ones? What medical facilities do you have access to? Will you have a support system?
Lending money to adult children
Lending money to adult children to help them purchase their first home or start a business can give them a much-needed financial lift, especially in trying economic conditions. Before doing so, however, ensure that you have a documented loan agreement in place and that lending them the money won’t compromise your financial future. Making a personal loan involves enormous risk, and non-payment of the loan can have devastating effects on your retirement.
Not eliminating 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 interrupt your well-laid plans. While you are earning and have extra disposable income, commit to getting rid of your debt as soon as possible.
Under-estimating your living expenses in retirement
Planning for retirement can be tricky as much of it rests on making assumptions regarding longevity, health and expenditure. Assuming that you are going to spend less in your retirement years can be a dangerous assumption to make. While your fixed expenses such as bond and vehicle repayments are likely to fall away, other expenses such as retirement home levies, higher medical aid premiums, home nursing and the cost of medical appliances need to be accounted for. Before merely assuming that your post-retirement expenditure will reduce by 20% or 30%, make time to prepare a detailed budget that takes into account all eventualities.
Keeping too much money in compulsory funds
Having all your money invested in compulsory funds, such as pension, provident and RA funds, can cause post-retirement cash flow problems down the line. When retiring from a retirement fund, you are required to use at least two-thirds of the capital to purchase an annuity income, and drawdowns from your annuity are limited to a maximum of 17.5% of the value of the fund per year. It is always advisable to have a nest egg held in a discretionary fund, such as a unit trust portfolio, which can be used as an emergency fund and to pay for larger capital expenditure in retirement. Finding the most tax-efficient balance between discretionary and compulsory investments is an important part of the retirement planning process.
Falling for get-rich-quick 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 schemes, investing in multi-level marketing companies, or falling for Ponzi schemes. Do not be tempted to seek out investment opportunities that promise unrealistic market returns. Rather, seek the advice of an independent, fee-based advisor who can direct you toward reputable investment companies.