We all know that people are working longer, living longer and retiring later, the result of which is that there are still plenty of financial decisions to be made in one’s sixties. However, this decade leaves little room for error so give consideration to the following commonly made mistakes in this all-important decade of financial planning.
Not having a long-term care plan
Healthcare costs in retirement are widely underestimated and, as a result, often inadequately budgeted for. Many people in their sixties who enjoy reasonably good health tend to overestimate their health and, as such, fail to properly prepare for a time when their health may fail them. While we know that medical science is keeping us alive for longer – often allowing us to live with chronic illnesses – many retirement plans have not kept pace with what this actually means from a financial perspective. In the 2019 Just Retirement Insights survey, it was found that 43% of participants revealed they had not thought about dementia or Alzheimer’s at all, whereas 30% had thought about it but had not made any plans to protect their financial future. Only 27% of participants confirmed that they had thought about the matter extensively and had put proper plans in place.
Developing a long-term care plan for a time when you may require full-time caring is something that every pre-retiree should undertake as part of their retirement planning. Failing to do so can place unnecessary financial burdens on your close friends and family, and can leave you financially vulnerable at a particularly stressful time of life.
If you haven’t already done so, start developing a long-term care plan that takes into consideration various options such as frailcare, home care, assisted living, or living with an adult child. Do research into what the various options will cost and how well your current budget would be able to accommodate these costs. As it currently stands, full-time home care starts at around R18 000 per month, with these costs increasing considerably if more specialised care or nursing is required. There is a broad range of frailcare facilities in South Africa which vary from basic frailcare services starting at around R15 000 per month, to top-of-the-range frailcare facilities costing up to R75 000 per month. Other healthcare cost factors that should be taken into account when developing your long-term care plan is your continued medical aid premiums (with annual increases generally between 9% and 11%), gap cover, over-the-counter medication, wheelchairs and walkers, hearing and visual aids, medical appliances and adaptive aids.
While you may feel fit and healthy in your sixties, it is safer to err on the side of caution to develop a long-term care plan in case you need it later on. Importantly, share the details of the plan with your adult children and loved ones to give them peace of mind that you have a workable plan in place.
Retiring too soon
Many people dream of early retirement without giving careful thought as to what this means for them financially. While retiring at age 55 may seem like a great idea, the reality is that there are very few in a position to do so. According to the Just Retirement Insights survey, 44% of those surveyed had not done any retirement budgeting, while 53% had not calculated how much they would need per year in retirement, and only 20% felt confident that they had enough money saved to cover their living expenses until they reach age 100.
However, while the industry ‘rule of thumb’ for a sustainable retirement is to work on R4 000 per month income for every million rand of retirement savings, the survey found that the respondents’ expectations far outreached the reality with those surveyed believing that an income of R8 000 per month would be generated from every million rand saved. In addition to overestimating their retirement income, the survey found that females tend to underestimate how long they will live. Their research found that 75% of females will be alive at age 80, and 10% alive at age 100. 75% of men can expect to still be living at age 75, while 10% can expect to still be alive at age 95. This means that, if you are a woman planning to retire at age 55, there is a 75% chance that you will need to provide for 20 years’ worth of retirement income and a 10% chance you will need to plan for 45 years’ worth of retirement income.
Put another way, if you started work at age 25, your 30 years’ worth of income may need to provide you with a retirement income for a 45-year period. While retirement annuities allow you to retire from the fund from age 55 onwards, and pension and provident funds usually have formal retirement ages of between 60 and 65, be sure to undertake careful planning before making any retirement decisions. An experienced advisor will be able to analyse your investments, gauge the most appropriate investment risk for your timeline, and prepare detailed post-retirement cash flow modelling for you to show exactly how long your capital will last based on your income needs.
Holding onto the family home for sentimental reasons
Even once their adult children have their own homes and families, many retirees choose to hold on to the family home for sentimental reasons rather than downscaling to a more manageable-sized property. If the longer-term plan is to ultimately downscale into a smaller retirement home, consider doing it sooner rather later.
Firstly, the maintenance and upkeep costs on a larger property can be an unnecessary financial burden to carry in your pre-retirement years, and this money could be better spent financing a long-term care plan, for instance. Secondly, if you start running out of retirement capital, you may need to sell your property during unfavourable selling conditions which may result in you netting out less capital from the sale. There are numerous other costs involved in retaining a large property including higher rates, greater energy consumption, the cost of increased security, domestic and garden services, and general home repairs and upgrades.
When developing your retirement plan, ask your advisor to prepare comparative scenarios to demonstrate the effects of realising the family home during your sixties, for instance, versus realising it during your eighties. This type of analysis often gives clients meaningful information with which to base their decision on.
Giving away your assets too soon
If you are well-funded for your retirement and plan to leave a financial legacy to your adult children, you may be tempted to start providing your adult children with some of their inheritance while you are still alive. Tough economic times and the high costs of living has made this a common approach to estate planning, although there are inherent risks in doing so.
Firstly, unless you have a comprehensive retirement plan with stress-tested setup assumptions, giving away some of your wealth while you are still alive may not a good idea. If you are asset rich but cash poor, giving or lending money to an adult child could have detrimental effects on your retirement income and may result in you having to realise assets prematurely – or even force you to realise assets you had no intention of selling, such as a family holiday home or farm. This, in turn, can have tax and CGT consequences that you had not planned nor budgeted for.
Before giving away any assets in your estate, ask your advisor to prepare a detailed estate plan for you so that you have a full understanding of the various assets in your estate, the liquidity in your estate, and the tax and CGT implications should you realise an asset. Once you’ve got a clear picture, your advisor can develop a number of scenarios for you demonstrating what effect parting with assets during your lifetime will have both on your estate plan and on your retirement plan. In this way, you will be equipped with sufficient information to make informed decisions regarding your legacy and how best to distribute your assets to your loved ones without compromising your financial future.