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What to consider when determining your retirement cash flow needs

If you underestimate your post-retirement expenditure, you run the risk of running out of capital during your retirement years.

If you’re approaching retirement, determining your income and cash flow needs in retirement will be a critical part of the planning process. If you underestimate your post-retirement expenditure, you run the risk of running out of capital during your retirement years or running into cash flow problems when it comes to drawing down from your annuities.

Find a baseline income

While rules of thumb can be a useful guide for determining your post-retirement cash flow needs, as you get closer to retirement, we advise that you take a more precise approach to your calculations. Many suggest that a post-retirement income equivalent to between 70% and 80% of your pre-retirement income should be used as a guide, but this is subject to a number of factors such as the levels of debt you were servicing in the years leading up to retirement, the percentage of your taxable income you were investing towards retirement, and the costs of the long-term insurance you had in place. Ideally, take a careful look at your actual expenditure and consider the standard of living you envisage for yourself in your retirement years. This will help you develop a baseline budget which you can then adjust and refine as you consider the various post-retirement costs more carefully.

Deduct your investment contributions

Formal retirement marks the point where you effectively stop contributing towards your various investments and begin drawing down from them. As such, when calculating your post-retirement expenditure, you will need to deduct the amount that you’re currently investing towards your nest egg. Remember, if you started investing early on in your career, your investment contributions as a proportion of your income are likely to be smaller than if you only started investing later on in life – which demonstrates the danger of relying on rules of thumb in determining how much you will need after you retire.

Deduct your debt repayments

Ideally, you should aim to settle all your debt by the time you retire which means that you can deduct your home loan, vehicle and credit card repayments from your post-retirement budget. Before retiring, our advice is to develop a plan that will allow you to settle your debt in the most tax-efficient manner while ensuring that you retain sufficient discretionary money to provide for your cash flow needs throughout your retirement.

Reduce your insurance premiums

Retirement is an opportune time to do an in-depth review of your risk cover, although there are a number of important factors to take into account when doing so. Firstly, keep in mind that much of your life cover would have been put in place to insure against any debt in your estate in the event of your death and, settling your debt at retirement means that you may be in a position to decrease your life cover. That said, life cover is a highly effective estate planning tool, and we advise that you do not cancel or reduce any life cover until you’ve had an updated estate plan prepared. From an estate planning perspective, you may need life cover to cover estate duty liabilities in your deceased estate or to provide capital to your loved ones in the immediate aftermath of your death. Some benefits, such as capital disability, may fall away at age 60 or age 65, meaning that this premium will fall away as well. Very often, dread disease or severe illness cover is for whole-of-life and, as many diseases are a function of old age, it is advisable to keep such cover in place if you can afford it.

Healthcare costs

We all know that medical inflation outstrips consumer inflation by around 3% – 5% per year, and it is, therefore, essential that you build these increases into your post-retirement budget. However, there are a number of other factors that should be taken into account when assessing the future costs of your healthcare. If you currently receive a medical aid subsidy as a result of your employment, find out what happens to this subsidy once you retire. If you’ve been relatively healthy to date, it may be that a good hospital plan has been sufficient for your needs. Consider, however, that you may need to move onto a more comprehensive plan option later in retirement which can significantly increase your medical aid contributions – something which should be factored into your budgeting. Also important to keep in mind is that most medical aids have benefit limits for high-cost items such as hearing aids, medical appliances, spectacles, walking aids and devices, and prosthetics – and if you need any of these in retirement, you may need access to discretionary funds to help cover the costs.

Costs that increase with age

Some expenses, such as gap cover and vehicle insurance, have higher premiums for pensioners so be sure to include this in your budgeting. Many gap cover providers age-rate their premiums, with lower rates for those under age 55, slightly higher rates for those aged 55 to 64, with the highest rates being charged to those over age 65. Similarly, short-term insurers regularly increase vehicle insurance premiums for pensioners as a result of their higher risk profile.

Costs that reduce with age

Thankfully, there are a number of costs that reduce with age and our advice is to educate yourself on the various pensioner discounts available. For instance, if you’re a property owner, you may be able to qualify for rates rebates on your property of between 40% and 100%. Many clubs and gyms offer pensioner discounts on their membership fees, as do many retail outlets, tourist venues, restaurants and transport companies. Many service providers don’t actively advertise their pensioner discounts, so be proactive about asking for them.

Retirement accommodation

If you’re planning to downscale your accommodation, keep in mind that smaller does not necessarily mean cheaper. Do your research into the costs of retirement homes and villages, specifically when it comes to deposits, levies, meals, additional services, club and membership fees, and how the re-sale of life rights work.

Lifestyle changes

Changes to your lifestyle after retirement will also impact your budget, so think carefully about what your day-to-day life will look like in retirement. Some costs, such as clothing, fuel and convenience food, may reduce as a result of the fact that you’re no longer working, while other costs such as hobbies, clubs, entertainment and travel may increase, depending on your goals for retirement.

Large capital expenditure

Large, irregular expenses in retirement should also be anticipated and budgeted for to ensure that you have sufficient capital in your discretionary pot. For instance, if you have adult children, you may need to contribute towards the costs of a wedding or assist them with the purchase of their first home. Other potential capital outflows could include overseas travel, expensive medical appliances, home or vehicle modifications, the purchase of a new vehicle, or purchasing a life rights unit.

Long-term healthcare costs

One of the most difficult items to budget for in a retirement plan is one’s long-term healthcare costs, but our advice is to budget for a worst-case scenario. Frail care, assisted living, sub-acute facilities and private nursing are hugely expensive and, if you reach a point where you are unable to care for yourself, you need to ensure that your finances allow for such care. Failing to provide adequately for these costs can place an impossible financial burden on your loved ones. Once again, research the costs of this type of care – keeping in mind that many retirement villages offer these facilities on-site at an additional cost – and factor them into your post-retirement budget.

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Craig Torr

Crue Invest (Pty) Ltd

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