Most working people dream about a carefree retirement, but the reality is quite different for the majority of retirees. Long-term research indicates that, out of every 100 working South Africans, the situation at age 65 would be as follows:
49 will be dependent on the state or family;
29 will have died;
12 will be bankrupt;
five will still be working;
four will be able to retire comfortably; and
one will be wealthy.
There are a number of reasons for this worrying state of affairs. Firstly, many people have unrealistic expectations regarding retirement. Their income after retirement is usually less than anticipated, the effect of inflation over time is not taken into account and their expenditure does not decrease as expected.
Secondly, there is a general misconception of “how much is enough”. People believe that membership of a retirement fund will provide sufficient provision for retirement, and they do not take into account possible outstanding debt and probable increased medical expenses. A common mistake is time. The sooner you start, the better.
Finally, many people choose the wrong options. Usually too much is invested in one asset class or instrument, for example property, and no provision is made for an emergency fund. When changing jobs, it frequently happens that retirement provision is not preserved, and insufficient provision is made for risk cover.
It is therefore vital that a number of important financial aspects are considered in retirement planning.
Risk
The general rule is that by taking higher risk in investments, the potential return could be higher, but the opposite is that there is also the risk of potential losses. It is essential that you know your risk profile. Stay away from “get rich quickly” schemes. If it sounds too good to be true, it is. Check the integrity, knowledge and experience of your financial advisers.
Generally retirement annuities are tax-efficient means to provide for retirement. They have the further advantage of protecting people against themselves, because the proceeds cannot be accessed before the age of 55, except in case of disability. Even if a person is declared insolvent, the funds are fully protected against creditors.
Diversification
Do not put all your eggs in one basket: spread your retirement provision regarding term, asset class and risk. On the other hand, do not go so far that it becomes difficult to keep track of your investments.
Liquidity
It is important to have access to funds when needed, but plan carefully because excess liquidity could be costly.
Tax
Tax is a very important aspect, but be careful not to save so much on tax that you do not have sufficient liquidity and/or income. Also, be mindful of the effect of capital gains tax. Try to spread the payment date of retirement funds so that they are tax efficient. Remember, expert tax advice can save you a lot of money.
Inflation
Carefully consider the influence of inflation and the time value of money. Remember that certain expenditures, for example medical expenses, are subject to much higher increases than those indicated by general inflation figures.
Planning and budgeting
It is possible that you could live longer than what you initially planned for, so let your capital grow for as long as possible.Do thorough estate planning and ensure that your will is kept up to date. By doing proper financial and retirement planning from an early stage and by managing the process carefully, a well-deserved and carefree retirement could become a reality.
Neels Steenkamp is from Assupol Life Financial Services