Everyone longs for a financially secure retirement. A time when you can sit back and relax while you enjoy the fruits of your labour for the most part of 40 years or more.
However, there are numerous threats that can have a dire effect on your plans and dreams. Some of them are self-made and others can be inflicted on you. In compiling a list of the 10 main threats, herewith are the first five to take into consideration when you try to achieve a financially secure retirement:
Lack of proper planning
Since most retirement funds in South Africa are defined contribution (DC) funds, compared to defined benefit (DB) funds of the 1990s and before, a lack of proper planning is often the biggest threat. With DC funds placing a lot of the responsibility on you, you need to decide how to structure an inflation-matching retirement-income flow that will be sustainable until you (and your partner) die.
By setting realistic targets based on what you have achieved historically and what you need to achieve in the future, a financial plan should be the first step to avoid a major threat to your retirement. As most people tend to leave financial planning for retirement until a few years before they retire, they put truth into the adage of “if you fail to plan, you plan to fail”. To correct historical problems is often not possible when you have left it too late.
Planning includes setting goals and budgeting properly to achieve a sustainable income flow. As it is not a simple matter, most people need assistance in this regard, and it is strongly advised that they get sound advice from a reputable, skilful and knowledgeable financial planner with whom you have built up a long-term relationship. A financial planner who places your interests first.
With numerous factors and variables that need to be fed into complex calculations before the different potential outcomes can be compiled, you might end up selecting the most appropriate and affordable options and not the optimum desired option. In short, to avoid the threat of a lack of proper planning, involve a reputable financial planner from the get-go.
Longevity or life-expectancy
People are living longer and getting older across the world. In South Africa, the latest predictions are 79 years old for a man and 84 for a woman before you die – but, you might live even longer. In developed countries, longevity has become a major issue and when people have saved what they consider to be sufficient, pensioners may find that they need to reduce their standards of living after 20 to 30 years into retirement.
Longevity means that you will need a lot more money when you retire to be financially secure through retirement. With every chance to live longer, it might get to a point where your retirement years can be almost as long as your working years. Major contributors to longevity have been advances in medical technology, better access to healthcare and generally more healthy lifestyles.
You might live longer in retirement but health issues common to old age could be a major threat to your secure retirement plans. With more and more people dying of mental and physical degenerative diseases, several issues arise as a consequence:
- Degenerative physical and mental diseases require expensive long-term treatment and care. As much as 60% and more of a total lifetime’s healthcare costs are spent after the age of 60.
- Many sophisticated treatments now available to help keep you alive for longer are expensive.
- The rise of medical costs is alarming and means that medical costs are likely to absorb an even greater proportion of your retirement income as you age.
- Many pensioners can no longer afford to contribute to a medical scheme and as a result they either downgrade their level of medical cover or bail out of medical schemes altogether.
- The need for frail care is likely to be a requirement as you age, with its associated costs.
- Dementia, which can make its effects felt very slowly, can have tragic financial consequences when you lose the ability to retain some measure of control over your affairs and make decisions that could undermine your financial security.
What you have done (or didn’t do) in the past will impact your financial security in retirement. You face a significant problem if you have not started saving soon enough, have not saved enough, have withdrawn your retirement savings along the way, have been hit by bad luck and made poor investment decisions. There are only three real solutions to the historical problem of not having sufficient money saved by the time you expect to retire namely continue to work, reduce your standard of living and rely on the goodwill of others such as friends and relatives.
The choice of annuity or pension
The last threat in the first part of this two-part series, which will have a considerable impact on your income flow, is the choice of pension or pensions and the way some of the choices are structured.
With choices becoming complex, numerous and diverse, as well as the increasing risks, it is somewhat of a concern to the government. The introduction of regulations includes a requirement to ensure that members are given access to retirement benefit counselling. It also requires that your fund should offer you one or more default annuity options. If you do not opt for the default, you will need to purchase a pension from a commercial provider, probably at a higher cost and resulting in a lower pension.
Five more points will follow in part 2 of the threats to a financially secure retirement.
Please visit www.retirementplanning.co.za for more information on the books “The Ultimate Guide to retirement in South Africa” and “Secure your Retirement”, which was written by Wouter Fourie and his co-author, Bruce Cameron.