Five risks to your chances of retiring well — and the antidotes
Open any newspaper and you will be overwhelmed by news about the tough economic climate, low economic growth and the challenges these may pose to your income and pension.
While these conditions may be a risk to your pension fund, the greater risk to your nest egg and to you retiring comfortably is much closer to home and within your control.
In the second edition of The Ultimate Guide to Retirement in South Africa, fellow author Bruce Cameron and I highlight 10 risks to retiring comfortably. Here are the first five:
Lack of proper planning
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The risks here are numerous, but many of them boil down to being overoptimistic. Being overoptimistic includes thinking that your lack of proper planning and investment in the first half of your career will be magically erased in the second half, and, once you start planning for retirement, thinking that you will fully understand all the complex calculations and fee structures of the various investment products available.
The best antidote for this is to get help from an independent financial planner with a Certified Financial Planner accreditation.
Be sure to check his or her credentials and ensure that your financial planner is not tied to any product supplier and can provide access to the whole investment market.
Your poor investment history
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Tied to poor planning, you must keep in mind your past practices and how they will affect your life after retirement.
If you have not saved enough because you have withdrawn some of your retirement funds when you changed jobs or lost money on an ill-advised investment, you may have to face facts and adjust your post-retirement expectations.
If you do not have enough savings to retire comfortably, you may only have three realistic options: reduce your standard of living, continue to work for longer or rely on friends and family to support you.
Longevity
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Each successive generation is living longer than the one before and by most estimates, babies born today will live to 120 years old.
As we live longer, we will find ourselves relying on our retirement savings for much longer.
This will require careful planning and perhaps a supplementary income stream, such as a second job to make ends meet.
Health
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Do you know that most of your lifetime spending on health-care costs will come after you retire?
Unfortunately, pensioners are faced with the double whammy of rapidly increasing health-care inflation and more visits to the doctor and hospital as they age, placing an increasing strain on their available income.
The risk is that without proper planning, many retirees end up abandoning private health care at a time when they need it most.
This places a significant damper on their quality of life during what should be their golden years.
Your choice of annuity
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As most pension funds moved from a defined benefit model (that pays a pension related to your final earnings) to a defined contribution model (that pays only your accumulated savings), the responsibility shifted to you to decide how to invest your pension lump sum so that it would provide the necessary monthly income after you have retired.
But investing is complex and risky and there are many different options available, each with different benefits, investment philosophies and fee structures.
Faced with this complex choice, many pensioners feel overwhelmed and take the first option offered by their local pension fund broker, even though this may not take their personal needs and lifestyle goals into account.
Fortunately, a change in the pension fund law this year has obliged pension funds to offer a standard default option that is affordable and offers decent rates of return. This may be a better option than buying an off-the-shelf pension fund, but it will in all probability never outperform the growth of a bespoke investment plan that is tailored to your lifestyle goals, available funds and stage of life.
When you are young and have a long life ahead of you thinking about retirement is boring. Thinking about it when you are near retirement age or you are facing sudden retrenchment can be daunting.
Finding a competent, independent financial adviser may be your best bet at any stage of your life to help you save and retire comfortably.
Fourie is the CEO of Ascor Independent Wealth Managers and a former winner of the Financial Planning Institute’s Financial Planner of the Year award. In a future column, he will discuss five more risks to retiring financially secure, including inflation, complex and confusing product structures and being part of the “Sandwich Generation”.