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Lfi­nances. “Have I made the right de­ci­sion not to take the sev­er­ance pack­age? I will be re­tir­ing in four years’ time. What should my pri­or­i­ties be now?” asks Livo.

Early re­tire­ment can be tempt­ing, es­pe­cially af­ter work­ing at the same com­pany for so long, but it usu­ally re­quires prior fi­nan­cial plan­ning as you need to have suf­fi­cient funds by the age of 55.

By re­tir­ing early, you have five less years to ac­cu­mu­late money to­wards re­tire­ment and you have to fund those ex­tra five years.

If Livo re­tired at 55 and lived, for ex­am­ple, un­til he reached 80, that would be 25 years of re­tire­ment in­come re­quired.


Livo was of­fered early re­tire­ment last year at the age of 55 af­ter work­ing for his com­pany for 38 years. He de­cided not to take the of­fer, but to work un­til the nor­mal re­tire­ment age of 60 as this would pro­vide him with the time to sort out his ivo cur­rently has a take-home salary of R24 000, with a re­tire­ment ben­e­fit of R2.9 mil­lion. Lizl Budhram, ad­vice man­ager at Old Mu­tual, ex­plains that while this may seem like a lot of money, it would pro­vide him with a gross in­come of only R16 800 a month*.

“By de­lay­ing one’s re­tire­ment for four years and con­tin­u­ing to make monthly con­tri­bu­tions to your re­tire­ment fund each month, it is pos­si­ble to sig­nif­i­cantly in­crease the in­come you would re­ceive in re­tire­ment,” says Budhram.

For ex­am­ple, if he con­tin­ued con­tribut­ing R4 500 a month to his re­tire­ment fund and earned 10% per year over the next four years, the fund would grow to about R4.5 mil­lion.

“In ad­di­tion, he will be four years older and there­fore re­ceive a bet­ter an­nu­ity rate,” ex­plains Budhram, who says th­ese fac­tors com­bined would re­sult in an in­come of about R27 800* in re­tire­ment in four years’ time. This would be close to his cur­rent salary ad­justed for in­fla­tion. By wait­ing an ex­tra four years, Livo could re­tire very com­fort­ably.

As his in­come needs dur­ing re­tire­ment may be less than his cur­rent needs, Livo could con­sider tak­ing his R500 000 tax-free lump sum on re­tire­ment and in­vest­ing the re­main­ing es­ti­mated R4 mil­lion for in­come. The tax-free lump sum can then be used to pro­vide ad­di­tional dis­cre­tionary in­come (with spe­cific in­come tax ben­e­fits), or for any cap­i­tal need he may have at re­tire­ment (such as a hol­i­day or ed­u­ca­tion costs for a de­pen­dant).


Livo has sev­eral debts and a child who is still fi­nan­cially de­pen­dent on him. He has fi­nance on two cars, which will be paid off in the next two years, as well as credit card and other debt.

His youngest child will only be ma­tric­u­lat­ing in two years’ time. Livo lives on a prop­erty owned by his em­ployer, but he has built a re­tire­ment home and is still pay­ing off the bond.

The fact that Livo still has out­stand­ing debts and a child at school is an­other good rea­son to post­pone re­tire­ment. “Be­ing debt-free in re­tire­ment should be your top pri­or­ity. To avoid debt at the re­tire­ment date, con­sider post­pon­ing the re­tire­ment date, if pos­si­ble,” says Budhram, who ex­plains that with­out those debt re­pay­ments, his monthly ex­penses will be lower and he could bet­ter man­age on his pen­sion.


If Livo’s child wishes to study af­ter com­plet­ing ma­tric, Budhram says that Livo needs to plan for this as part of his re­tire­ment costs.

“He needs to de­cide whether he will fo­cus only on pay­ing off ex­ist­ing debt, or whether he can also save for ed­u­ca­tion needs.

“When he re­tires, he could per­haps use some of the re­tire­ment fund lump sum to pay to­wards ed­u­ca­tional ex­penses, but th­ese op­tions and im­pli­ca­tions should be dis­cussed with a fi­nan­cial plan­ner.”


Budhram says re­tire­ment is also a good time to re­view your will, your poli­cies and the ben­e­fi­cia­ries on your poli­cies. For ex­am­ple, does he need life in­sur­ance if his child is still fi­nan­cially de­pen­dent on him, or has he pro­vided for the child’s liv­ing and ed­u­ca­tion costs sep­a­rately? If he does re­quire life cover, could he con­vert his com­pany group cover, or does he have life cover on his re­tire­ment an­nu­ity?

He also needs to as­sess his med­i­cal costs, which will in­crease as he gets older. He may need to con­sider a fully com­pre­hen­sive med­i­cal scheme, gap-cover in­sur­ance or crit­i­cal-ill­ness in­sur­ance so that his re­tire­ment funds are not wiped out by ill health.


If Livo only re­tires at the age of 60, he has to con­sider ei­ther a life an­nu­ity, which will pay him a guar­an­teed in­come for life that ad­justs for in­fla­tion, or a liv­ing an­nu­ity, which al­lows flex­i­bil­ity, as he can draw­down be­tween 2.5% and 17.5% of the cap­i­tal each year.

How­ever, it is im­por­tant to note that if he chooses a liv­ing an­nu­ity, the rec­om­mended draw­down rate by the As­so­ci­a­tion for Sav­ings and In­vest­ment SA is 5%, which is most likely to pro­vide an in­come be­low his cur­rent needs.

Liv­ing an­nu­ity: The money is in­vested in a port­fo­lio and pays an in­come from the in­vest­ment. You can se­lect your in­come, but the prob­lem is that many pen­sion­ers se­lect a draw­down rate that is too high and this then places their fu­ture in­come at risk as the cap­i­tal runs out. Budhram says one of the main attractions of a liv­ing an­nu­ity is that any re­main­ing cap­i­tal in­vested in a liv­ing an­nu­ity is re­tained for the ben­e­fi­cia­ries in the event of the death of the pen­sioner, but with a life an­nu­ity this is not the case, un­less life cover is added to the an­nu­ity.

Life an­nu­ity: This pays a guar­an­teed in­come for life, which can cre­ate more cer­tainty and peace of mind, since the in­come is guar­an­teed for the rest of the pen­sioner’s life and can also in­clude a pen­sion for the spouse should the main mem­ber pass away.

Budhram warns, how­ever, that there can still be the risk of the in­come not keep­ing up with in­fla­tion.

If Livo se­lects this op­tion, he must se­lect an an­nu­ity that in­creases with in­fla­tion each year. Ini­tially, the in­come would be lower than a non-in­fla­tion-linked an­nu­ity, but within a few years, it will be worth more than the fixed-in­come an­nu­ity.

“This de­ci­sion is one of the most im­por­tant fi­nan­cial de­ci­sions a per­son will make and it is im­por­tant to get good ad­vice,” says Budhram.

It is cru­cial to have a de­tailed con­ver­sa­tion with a fi­nan­cial plan­ner to fully un­der­stand all the im­pli­ca­tions of this im­por­tant an­nu­ity de­ci­sion, and also to en­sure that the risks at­tached to the op­tions are com­pletely un­der­stood and ap­pre­ci­ated be­fore mak­ing a se­lec­tion.

“A strong and healthy pen­sioner like Livo will need to en­sure that his re­tire­ment cap­i­tal pro­vides a longterm sus­tain­able in­come dur­ing the re­tire­ment term. Also bear in mind that if a liv­ing an­nu­ity is se­lected, it is im­por­tant to re­view the in­vest­ment funds and choices un­der­pin­ning this an­nu­ity on an an­nual ba­sis to en­sure that the in­vest­ment fund choices and draw­down rates re­main ap­pro­pri­ate.

“This should be done in con­sul­ta­tion with a fi­nan­cial ad­viser, who can as­sist with the nec­es­sary anal­y­sis, pro­jec­tions and guid­ance.”

*This rate was based on a sin­gle life with-profit an­nu­ity with a 10-year guar­an­tee pe­riod

us­ing cur­rent an­nu­ity rates

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