Your focus changes as you move through each phase
ESTER OCHSE and SAMUKELO ZWANE
PEOPLE DON’T really think about retirement, because it seems so far away—but then one day it’s right around the corner. So what do you need to consider when it comes to retirement?
It is most convenient to divide retirement planning into three separate phases, each with its own considerations. These three phases are the build-up, final-lap, and retirement phases, respectively.
Pre-retirement (‘build-up’)
What does the idea of retirement look like to you? Do you want to be a home body, or do you want to travel? The reason why this is important—be-cause that will determine how much you need for retirement, what the retirement gap is, and how much you still need to contribute to achieve your goal.
Investment vehicles and choices
A pension fund from your employer is one way to save for retirement. The pension fund’s investment selections may make it easier to boost your contributions if you’re just starting out.
An independent retirement annuity gives you many investment options (subject to some limitations), while a Tax-Free Savings Account can be used to boost retirement savings because it is tax-free (if you remain within the contribution limits). Diversifying your retirement savings vehicles increases your chances of retiring comfortably.
Preserving your retirement savings
Whenever you change jobs, make sure to keep whatever retirement savings you may have from your previous company. There are several possibilities here as well, but the key is to keep the savings to benefit from compound interest.
The longer you save for retirement, the better off you will be. The most significant contributor to people not retiring comfortably is a failure to preserve their retirement resources.
Don’t leave planning too late
Postponing retirement will reduce the amount of money you have for retirement.
For example, if one is considering saving for retirement, the individual who waits until age 35 will have to contribute 267% more than the person who starts at age 20.
That is the advantage of compound interest: The earlier you start, the better.
Near retirement (‘final-lap’)
Once you get to a couple of years before your expected retirement date, it’s a good idea to making adjustments that will enable you to transition into retirement life. This is far preferable to the ‘cold turkey’ approach where you end up being forced into sudden changes virtually overnight.
Here are some ways in which you can smooth the transition into retirement:
- Reduce expenses: Look over your budget to see where you could save money, and maybe pay off some unsecured debt faster.
You should also think about how much you spend on things you don’t need. A budgeting tool like Smart Budget on the FNB App could help you better manage your money.
- Asset allocation: Make sure your pension savings are appropriately aligned with your retirement plans.
If you’re considering a life annuity, include cash and bonds in your portfolio to lower market risk. If you’re in a life stage portfolio, your employer’s pension fund will usually do this.
If you’re considering a living annuity in retirement, growth-type assets like shares and property may be better as you’ll still be exposed to the market to boost returns while minimising risk.
- Retirement options: Start researching what your options are in retirement for your retirement funds are you going to choose a living annuity, life annuity or a hybrid of the two.
There are pros and cons to these options, and it is best to investigate earlier rather than later. This would be a great time to obtain financial advice or obtain benefit counselling from your employer’s retirement fund.
At retirement
This is the stage at which you start drawing down on your accumulated savings, so the key is to ensure that you have a regular income, that your portfolio is appropriately invested in order to provide an income for the rest of your life, and that your spending patterns are covered by the income you receive.
Annuity option
You need to decide which annuity option you would like to use for retirement.
- A living annuity provides income flexibility, but the risk is that you will run out of money if you withdraw income at a rate greater than the return on your portfolio.
- A life annuity provides income predictability, but the amount of income you can receive is pre-determined.
If you have enough retirement savings, you may be able to combine the two into a hybrid plan.
Asset allocation
If you have chosen a living annuity, it is essential to ensure that your asset allocation is adequate to sustain the monthly income you receive and to protect your capital.
Exposure to long-term growth assets, such as shares and real estate, may be advantageous for achieving these objectives, but should be balanced with assets such as bonds and cash to decrease portfolio volatility and ensure a comfortable retirement journey.
It is essential to meet with your financial advisor on a regular basis to determine the optimal asset allocation and income drawdown.
Budgeting
This is especially important in retirement because you only have so much money for the rest of your life.
Using tools like Smart Budget on the FNB app can help you manage your money better and using loyalty points like eBucks to free up cash flow can also help stretch your monthly budget.
The importance of setting goals
Retirement planning may be intimidating and thrilling at the same time, but there is one thing that a person should do early in their careers: establish what their retirement goals are, and then work towards those goals from the start.
Early professional retirement savings expose your fund to the potential growth that time offers, so that your savings become a recipe for a happy and financially secure retirement.
Ester Ochse is the product head at FNB Integrated Advice. Samukelo Zwane is the product head at FNB Wealth and Investments.
