Here are a few reasons why retirement planning is not a once-off event
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By Jaco Prinsloo
As a wealth manager, I have observed that there are two typical clients. Some dread retirement, while others look forward to it.
Those who dread it are the ones who are often not sure if they have made sufficient provision for comfortable post-employment life. Those who are looking forward to it are those who are confident of their retirement plans and are looking forward to not living the nine-to-five rat race.
Regardless of which type of client you are, I have come to realise that people often make the following mistakes when planning for retirement:
They fail to continue to monitor whether their retirement plan is still relevant and on track. Retirement planning is not a once-off event. It should be considered and monitored regularly, at least once a year. I find it helps to show my clients how that plan has evolved, to see if their drawings and their capital (investment) has grown or underperformed.
The second mistake is the overestimation of the value of downsizing one’s house at retirement. Many believe their current house is worth a large sum of money, and when they retire, they will sell it and use the proceeds to supplement their income. This is not unreasonable, but I find people often overestimate the future value of their house and do not consider the setup costs of a new home. This is especially true when moving into a security complex where the property prices are higher and there are additional fees to pay, such as levies.
There is often a disconnect between what people want for their retirement and what the reality will be. Retirees tend to have considerably more time on their hands with a need to fill it with leisure activities. There are, however, costs involved with this, and lifestyle discussions must be done right at the beginning of your planning stage to allow for this.
Another easily avoidable mistake is failing to assess your financial needs after you retire. It would be best if you continue to monitor your drawdowns. Budgeting remains a crucial ingredient of a successful retirement. You must ensure that there is more coming in than what is going out every month.
Generally, the aim is to retire with enough money to provide you with a monthly income equal to 75% of the final salary you earn. The Covid-19 pandemic, stock market volatility, job losses and political uncertainties have many clients concerned about their retirement provision. I have instances where professional clients are considering pushing out their retirement date, and although this is prudent, one must consider that events are ever-changing. Nothing is ever cast in stone, and that is why continuous conversations are so important. This is especially important because people are generally living longer with a better understanding of healthy living and eating, and the importance of exercise is a high priority in households. Also, we have access to better healthcare.
So, to avoid uncertainty or being presumptive, consider the following:
- Review your portfolio, retirement and discretionary investments, on an annual basis.
- Clients nearing retirement should consider a gradual reduction of risk on their overall portfolio. Taking income from the portfolio will mean that a massive correction on, for instance, the stock exchange could put immense detrimental pressure on their anticipated income.
- Clients in retirement, who have experienced a decline in their portfolios and are concerned, should consider how much income they need in the next year and maybe try and limit the drawing for a while – at least until asset values recover. But then it is also imperative to make the adjustment and reduce the overall risk so that the event does not repeat itself.
- Clients with discretionary investments could consider spreading risk with different investment vehicles, such as offshore exposure, local equity exposure, or property, but one should always consider the overall risk capacity.
- Tax and tax reduction should also be one of the primary considerations, both while saving and when in retirement. A good spread of discretionary and compulsory investments is generally seeking a good mix because you get to use all the benefits that SARS offers in the form of rebates and lower tax structures found in capital gains, interest, and dividends. Tax should always be considered on an individual basis as there is no one size fits all.
Do not react in emotion. Speak to your financial adviser or wealth manager.
Our job is to remove the emotions that come with periods of massive growth or recessions. We offer a well-balanced and unbiased opinion on stock market fluctuations, countering the sensational strategies of flash articles in the media. The calm investor that stays the course will be rewarded over the long term.
ABS – Always Be Saving!
Retirement planning is a multistep process that evolves over time. Being financially ready for retirement is the cornerstone, but my conversations with clients also include their hopes, fears, dreams, goals and aspirations. How they will fill their nine-to-five. What will give them meaning and purpose?
* Jaco Prinsloo is a Wealth Manager at PPS Wealth Advisory