Plan for a long retirement
LONGEVITY: NUMBER OF PEOPLE AGED 80 OR OLDER IS EXPECTED TO TRIPLE FROM 2020-2050
It is key to carry on earning as long as possible, experts advise.
We are living longer and that means we have to plan for a longer retirement than our parents did, for example. The World Health Organisation predicts that by 2030 one in six people worldwide will be 60 or older and the number of individuals aged 80 years or older is expected to triple between 2020 and 2050, reaching a staggering 426 million.
There is also renewed focus on how people across the world are living longer while leading happier, healthier lives, especially since the airing of the Netflix documentary, Live to 100: Secrets of the Blue Zones. According to the show, the Okinawan community in Japan does not even have a word for retirement. They continue working whether they are 55, 65 or even 95.
“Communities in certain areas created specific habits, rituals and cultural norms that promote longevity. One trait all these communities have in common is that they live within their means throughout their lives and some never retire,” said Lise-Mari Crafford at Allan Gray.
With people across the world living longer, economists forecast that living to 120 is now an imaginable concept within the next decade. “This has significant implications for retirement planning, especially given the financial and lifestyle changes associated with this milestone,” Crafford said.
You now run the risk of outliving your savings given the implications of people living longer. “If you have good health and can work for longer, delaying retirement could be a good consideration,” she said.
While it may seem difficult in practice, given that many companies in South Africa implement retirement for workers when they turn 60, she said people must look for opportunities to keep working, perhaps from a side hustle, a hobby, or by consulting.
“History has many examples of people who made their money after or near retirement age, because they either kept working, started their own ventures, or made money from their passion projects. While this may not be for everyone, embracing a mindset of postponing retirement can help you earn for longer.”
It is also important to keep the fact that you may live much longer when you transition your working life to retirement.
“Retirement is the point in your life when you start receiving an income from the money you saved in your retirement funds. The decisions you make at retirement will determine how much income you receive from your retirement savings and how long your money will last.”
Whether you are nearing retirement or still some time away, there are various factors worth considering before you transition from accumulating retirement savings to drawing an income. The first consideration is whether to draw a lump sum or not, which can be very tempting. Retirement funds allow you to take a maximum of one third of the value of your investment as a cash lump sum when you retire.
You have to invest the balance in a product that pays you an income, or pension, in your retirement, like a living, guaranteed or hybrid annuity. “Choosing to take a cash lump sum also has tax impossible plications and you must be comfortable with the consequences before deciding.”
If you withdraw a cash lump sum, Crafford said you must use it wisely. For example, you could pay off your debt, save for emergencies or use it to supplement your income through investing.
However, more cash upfront means less to draw later. Crafford said you will have to invest the retirement savings you do not take in cash in an annuity, which will pay you an income in retirement. A living annuity pays you a regular income in retirement, while a guaranteed annuity pays you a guaranteed income for life. There are benefits and challenges for both. “A key feature of a living annuity is that your savings and income can grow over time, depending on the performance of the unit trust you choose to invest in. But performance of your underlying unit trust can reduce the overall balance of your investment, which puts you at risk of outliving your money,” she warned.
Crafford said another benefit of a living annuity is that you decide how much income to receive from your investment, within legal limits, which you can review once a year. “Your underlying investments must earn a return higher than inflation for you to maintain the buying power of your retirement income over time without excessively reducing the value of your investment.”
You must also remember the more income you draw, the less sustainable your investment becomes and the greater your chances of running out of money.
“Approaching retirement can be an overwhelming experience. A financial adviser can offer you holistic and personalised advice for your specific situation.”
Approaching retirement can be an overwhelming experience