A retirement plan is only as robust as the accuracy of the underlying assumptions, and one of the most important assumptions to get right is the determination of post-retirement income.
While there are many rules of thumb regarding the calculation of post-retirement income, the reality is that every retiree has a unique set of personal circumstances and objectives for retirement – and it is these specifics, rather than general rules of thumb, that should be used in reaching a realistic post-retirement budget.
Many retirees plan to downscale their residence at retirement with a view to both freeing up some capital and securing more manageable accommodation that meets their retirement needs. But, a smaller home or retirement unit does not necessarily translate into reduced monthly expenditure so, rather than assume that your accommodation costs are going to reduce, be sure to do your research and read the fine print.
Living in a sectional title unit means that you will need to budget for monthly levies and for their year-on-year increases. Levies, which are set annually by the body corporate, are designed to cover all expenses that the body corporate encounters throughout a financial year, and can include maintenance of roads, gardens and swimming pools in the complex, cleaning, security, personnel, insurance, rates, and taxes. It goes without saying, therefore, that complexes with higher-end facilities such as jacuzzis, tennis courts, gyms, libraries, and club houses, will have more costs to cover and could therefore have higher monthly levies.
On the other hand, keep in mind that the monthly levies and administration costs of life rights schemes generally tend to be lower than those of sectional title units, and developers are required to provide a two-year cost estimate in respect of levies. As a results, life rights owners can expect to enjoy lower month levies which are easier to budget for into the future.
If you intend downscaling to a freestanding property, keep in mind that your rates, taxes, water, and electricity will remain standard budget items, and the escalating energy costs need to be accounted for.
Security is another important expense to budget for, especially if you intend living in a freehold property, so be sure to build the cost of ongoing security as well as security upgrades into your costing. As you age and become less physically mobile, expect to spend more when it comes to assistance around the home. This may take the form of additional domestic help to assist with housework, ironing, and general cleaning, garden services, pet grooming, bin cleaning, or pool maintenance.
Entertainment, exercise and local travel
With more time on your hands, expect to increase your line-item expenditure for entertainment, local travel, subscriptions, and membership fees. In the years leading up to retirement, you will no doubt have a feel for the activities and hobbies you would like to enjoy more fully in your retirement years, so start investigating these costs and creating a realistic budgetary framework.
Costs may include gym membership, sports clubs, hobby groups, book clubs, and hiking/walking organisations, so be realistic about what it would cost to enjoy these activities after retirement. You may also want to budget for lessons, courses, and tuition costs if you intend enrolling in computer, photography and/or language classes.
To remain active and engaged during retirement, expect to spend more time enjoying local travel, taking scenic drives, or enjoying short getaways, so make sure that you budget for a reliable vehicle, together with fuel, maintenance, and insurance costs.
In the process of determining your retirement income, don’t neglect to consider the capital outlays you might face during the course of your retirement. If you have adult children living abroad, budgeting for overseas travel – specifically during the early part of your retirement when you are likely to be more physically able to handle long distance travel – is important. That said, keep in mind that the costs of overseas travel have a tendency to exceed budget, so it’s advisable to build fat into your travel budget.
In a global village, remaining digitally connected – especially for the elderly who often attest to feeling digitally isolated and overwhelmed – is particularly important.
Given the high cost of technology and hardware, it is important to ensure that you budget for these costs, both in terms of capital outlay and in respect of ongoing monthly costs such as Wifi, digital subscriptions, and licensing. Other capital outlays may include wedding costs, graduation gifts, assisting with your grandchildren’s education costs, or helping your adult children purchase their first home. To ensure that you have sufficient discretionary capital earmarked for these purposes, consider making a list of the large capital expenses you could realistically face in retirement, and then build them into your retirement plan.
We all know that healthcare expenditure outstrips consumer inflation by around 4% per year, with the result being that your medical aid premiums as a proportion of your monthly expenditure will continue to grow over time. In addition to this, keep in mind that as you age and face more healthcare challenges, you may need to move onto a more comprehensive plan option which will naturally come at a higher premium.
As such, when estimating your medical aid costs in retirement, it is advisable as a minimum to budget for annual premium increases – including your gap cover premiums – inflation plus 4%.
That said, keep in mind that you are always likely to face healthcare costs that will not be covered by your medical aid and, while these may be difficult to budget for in advance, it is not difficult to research the typical healthcare costs of the elderly. Medical appliances, hearing aids, spectacle and visual aids, wheelchairs, walkers, and prosthetics are all high-costs items that can create financial challenges for retirees and realistically as you age you can reasonably expect to be faced with some of these costs.
Other costs worth considering include the costs of home alterations and vehicle adaptations that may be necessary as you become less mobile.
Some of the most difficult costs to budget and prepare for are the costs of assisted living, frail care and/or home nursing. The longer you live, the greater your risk of requiring elderly care in some form or another becomes and when this happens you can expect a massive increase in your monthly healthcare expenditure. As such, it is important that your retirement plan is structured to accommodate this eventuality, keeping in mind that your monthly annuity income may not be sufficient to absorb these additional expenses and you may need to access your discretionary funding to finance these costs.
Finding the optimal balancing between structuring your compulsory and discretionary portfolios, and the extent and timing of your withdrawals, is critical to developing a robust retirement plan.
While anticipating the costs you may be faced with in retirement can be overwhelming, keep in mind that there are a number of costs that are likely to fall away when you retire.
In the first instance, it is likely that your home loan will be fully paid up either before or at retirement which means that your bond repayments will no longer be a line item. Similarly, you will no longer be contributing towards your investments nor your life insurance, so these costs will also fall away.
That said, don’t lose sight of the fact that retirement can be a long life stage and your budget going into retirement can look entirely different to your budget fifteen years into retirement, and planning for these changed circumstances and costs is an imperative.