Most of us work for around 40 years to reach our “golden years” in retirement. This is the time that many look forward to. The time that we can relax, travel the world, spend time with our loved ones and generally just chill. Unfortunately, often the reality is very different to our pre-retirement dreams…
Over the years that I have been practising as a financial planner/advisor, I have walked the path with many clients who experienced “retirement blues”. Often the road to retirement follows the following path:
- Pre-retirement excitement;
- Planning the long-awaited cruise or holiday;
- Look at retirement options in terms of income;
- Start getting concerned whether there will be sufficient capital to last for life;
- Attend the farewell party and officially retire. This is both exciting and traumatic;
- Enjoy the first couple of weeks or months relaxing at home or on holiday but still wake up at the same time that you did when you were working;
- Reality starts setting in. You will never go back to your old office, and you no longer have a say in the business that you were involved in for so many years;
- Start looking for things to do, boredom starts setting in;
- Start questioning self-worth, especially if you had people reporting to you during your career. A feeling of uselessness starts to enfold you;
- Waking up questioning your purpose in life. Nowhere to go and no one asking your advice. Nothing to wake up for;
- Investment angst becomes more severe because now your investment portfolio will show more volatility than prior to retirement;
- Memory starts to deteriorate. Frustration creeps in;
- Health starts to deteriorate. Moving to a retirement village becomes a point of discussion;
- Selling your family home in lieu of a smaller retirement home creates the feeling that you have lost your freedom; and
- Losing a life partner causes despair.
Often depression sets in during one or more of the above phases.
Retirement can be very traumatic, but it does not have to be and fortunately for many retirees it is not. Admittedly, things will never be the same as when you worked prior to retirement but we must understand and accept that certain things will change in our lives as we get older and as we start the next phase of our lives namely retirement. The challenge is how to embrace the changes, adapt our lives and accept what life throws at us as we get older.
There are many factors to consider as one ages but I want to focus on three core areas. I believe if one can get these three areas sorted out then retirement can be pleasant and something to look forward to:
- Financial independence
- Pursue of a worthwhile interest
- Quality of life
Preparing for financial independence during retirement starts the day you start earning a salary. Let’s accept that not many people manage to do that and let’s also accept that most people retire on an income that is less than what they would have liked. Not many people can retire on an income equal to their last paycheque…
At the core of your retirement planning, you must have a budget. Without a budget, you cannot determine the extent of the capital required to fund the expenses. The budget must consist of monthly expenses, medium-term expected (or wants) expenses like a holiday or replacing a car, and long-term expenses like a retirement home. Monthly expenses must be linked to future inflation per expenditure i.e. medical expenses are higher than most other expenses and medical expenses will become a larger part of your monthly expenses as you get older.
The asset value we have the day we retire is what must carry us through to the day we die. This can consist of pension proceeds, investments, property, company shares, royalties, and anything else that can either generate an income or can be exchanged for cash. If the accumulated assets cannot fund your required income, you either must reduce your income expectations or reduce the term that income will be generated and start discussions with your children/family about possible future solutions and possibly their inheritance expectations.
This brings two important factors into play:
- Understand your investments and be mindful of the price you pay for being too conservative. I elaborated on this in a previous article “The cost of conservatism”. It is crucial to determine what return you require to meet your income needs for the rest of your life. Speculation time is now over. Forget maximum returns and aim for relevant returns. Cash and pure income funds are not the answer unless you intend to draw 2.5% maximum from your investments for the rest of your life. In the same vein, cryptocurrencies and investment schemes promising super returns should not be on pensioners shopping lists! It is sad to see that every time some financial scheme breaks news where millions and even billions are lost, pensioners are at the core of the biggest losers. It is harsh to say this but the scammers cannot take the full blame. Investors which include pensioners, must share the blame for investing (speculating?) in schemes where severe and even total losses can occur. These schemes always offer totally unrealistic promises. Guarantees mean nothing unless they are offered by one of the large financial institutions. Where pensioners have been investing in pure share portfolios for many years prior to retirement they can remain invested in those portfolios as long as they understand the volatility and risk versus return dynamics of such a portfolio. To start investing in such a portfolio after retirement is probably not a good idea.
An investment portfolio that remains unchanged post-retirement compared to pre-retirement will seem to be substantially more volatile than the pre-retirement portfolio. While contributing towards investments, volatility is smoothed out by the contributions that are being added to the investment portfolio. Once contributions stop and income is drawn from the portfolio the impression is created that the investment suddenly starts to underperform when compared to previous years. This is not necessarily a problem, but you need to understand why this is happening. This is also why it is important to consider changing the investment portfolio by separating income paying assets and growth assets once you start to draw an income from your investments. There are different theories about this and all of them are defendable.
What I mentioned above is the one school of thought. The other school relies on the total return of portfolios and drawing income from those portfolios without stripping out conservative funds to pay the income from. Both strategies are fine, and both can be justified during different market cycles. My suggestion is that if you get unnerved when your investment values drop (and they will drop!) then adopt the “bucket approach” where up to three years’ worth of income can be kept in cash and income funds from where your income will be funded.
For the even more conservative and elderly, investing your pension proceeds partly into a compulsory life annuity is not a bad idea. In this way, you know exactly what you are going to earn in future and income is guaranteed for life. Life annuity rates increase the older you are and pensioners in their 70s and 80s can get very attractive annuity rates of close to and above 10% per annum – more than twice the amount recommended to be drawn from living annuities. Just remember that annuities die with the annuitant. Joint life annuities are possible for couples ensuring income for the rest of both parties’ lives. The capital that was used to buy the annuity cannot be bequeathed to beneficiaries.
This may be the time to contract with a suitably qualified financial/life planner to consider the various options.
- Do not give funds away unless your wealth is exponential and your annual future drawings amount to less than 2% of your total wealth after you have gifted to loved ones. As human beings, we want to support charities and as parents, we want to help our children. Far too often do we encounter situations where kind deeds to children lead to the hardship of pensioners in years to come. There is no guarantee that your children or anyone else for that matter will be able to financially assist you in the future. Apart from it not being guaranteed it also is not fair to place that burden on your children. It impedes their future financial planning.
The benefit that children receive from the wealth their parents created should take place on the death of their parents unless as I mentioned earlier substantial wealth is at play.
This is a discussion that should be held truthfully and honestly with children and anyone else who has an expectation that you will assist them financially. Do not fake your wealth. If by calculation you are heading towards a situation where your capital is probably not going to be sufficient to fund your long-term income requirements, then you must say so. By not being truthful you are going to be the one ending up as the suffering party in the future. In my opinion, if you are relying on more than 5% income against your total investment portfolio, you plainly cannot afford to give any of the capital away nor can you spend freely on “nice to haves”. You must plan and stick to your budget profusely.
Pursue a worthwhile interest
As humans, our interests vary widely. We also tend to be very busy during our working lives. What better time to live out your interests and hobbies than when you are in retirement?
Many modern publications about life after retirement adopt the theme of “starting a new career when you retire”. This is a wonderful goal. You can take a hobby and pursue it to the point where it becomes a viable business, however informal that may be. This will give you purpose again as well as supplement your income if that is what you desire.
If you enjoy charity work, there are many opportunities and organisations that will welcome you with open arms. If your base of assets is large enough and you do not need the additional income charity work is very fulfilling. Charity work where fundraising is involved often offers financial incentives to the fundraisers.
The bottom line is that it is your choice. You can do what you love, how you want to do it, earn income (or not) and as often as you wish. Waking up in the morning and knowing how your day and your week is going to evolve lifts the spirit and provides fulfilment.
This does not just have to be hobbies like arts and crafts. It can be anything you are interested in and what you are good at. Some of my retired clients still actively consult for the corporate world and small businesses and they are in their seventies. I know retired people who had very successful careers who now consult on different levels, act as a tour guide, lead motorcycle tours across the world, compile accounting statements for small businesses, manufacture exclusive furniture, run a garden service, bake rusks, paint etc. There is no reason to fade into the shadows once you retire. Use your skills and experience. If you can’t do it yourself anymore teach someone else your craft.
You know how your family and marriage dynamics work. If you can pursue a similar interest and you want to do it that is fantastic. For those who have different interests, there is nothing wrong with each person pursuing their own interests and hobbies. That provides new topics to talk and bicker about…
While you are younger and more capable to participate in physical activities like hiking take advantage of it. Remember that we all get old and as we age, we lose our ability to do so.
Quality of life
Quality of life speaks a bit to both above topics. One often perceives that quality of life can only be attained through wealth. Although wealth can be a sweetener and make things more comfortable it is not the ultimate determinant of quality of life. I know many people who are wealthy, but their quality of life is not desirable…
When I speak of quality of life, I refer to the “feel good” part of life. Are people with more money happier, healthier and more content than people with less money? They may have nicer things but that is not a guarantee that their quality of life is better than those with less wealth. The old saying of “money can’t buy happiness” is true. But unfortunately, the saying that “sure, but at least in consoles” is as true. The bottom line is that every person must define what quality of life means to them. If you say, “give me R20 million and I will have a quality life” you are missing the point.
If I give you the option to choose between the following two scenarios, would you prefer to:
- Have R50 million in assets with no budget constraints, have no children or family and suffer from various medical ailments rendering you unable to travel far distances and walk freely; or
- Have R10 million in assets, live within a constrained budget, visit family, friends, and children often. Spend ample time outdoors with grandchildren and you have no mobility restrictions.
I think most people will opt for option 2. Unfortunately, many retirees edge towards option 1 without having a choice as time goes by.
That brings me to the point I am trying to make. Quality of life is a work in progress. Chiselling your future quality of life starts many years before you retire. The bonds you build, the friends you make and the way you present yourself to the world will stay with you and become a way of life. Although we cannot completely determine our destiny as far as our future health is concerned, we can remain part of the community irrespective of how old we are.
If your involvement in the community was meaningful, you will never be alone.
The one thing we must all get our heads around is denial. Stop denying that you will get old. Stop denying that you will get ailments (some more than others), stop denying that you are going to get forgetful and stop denying that if you do not plan properly, you will experience old age worried and resentful.
Make work of it and determine what quality of life means to you. Here I am referring to the non-monetary quality of life. Take your own circumstances into consideration including all aches, pains and ailments (now and in the future) and find a way to improve your quality of life even if it is in a small way. Don’t wait for the day that you are completely incapable to enjoy a meaningful life. Use your wealth, health and enjoy life to the fullest as only you can.
Hat’s off to the veterans and soon to be veterans of our economy!