| The word “retirement” is often thought of as something we only need to be worried about later on in life, but the years fly by so quickly that, for many people, it may come as a shock when you realise you’re only five years away from retirement.
A successful retirement plan is developed on the basis of extensive budgeting and balancing of assets and expenditures, and you need to start planning the details of your retirement at least five years before retirement. A Financial Adviser may be key to help you put financial goals in place in order to meet your retirement requirements.
Here are a few pointers to help guide you in your pursuit of financial freedom during your retirement:
Calculate your expected living expenses: Outlining a budget allows you to identify and align monthly expenditure with your current income. This is the starting point for forecasting how much income you need in retirement. A budget will also separate necessary living expenses from luxury spending. When we assist our clients with budgeting, we also take inflation into account, helping us to determine the cost of living at retirement. Build in medical costs: Retirement is not cheap – it’s been said that we incur over 80% of medical expenses in a lifetime after retirement, so adequate medical scheme cover is essential. If you’re not already on a fully comprehensive scheme, you need to factor this cost into your retirement expenses. Settle your debts: Ideally, we want to enter retirement free of debt. You will need your retirement income to cover your living expenses, not interest. Boost retirement savings: With recent legislation changes, you can now invest up to 27,5% of your income and enjoy a tax benefit in doing so. Most people find that they have under-saved for retirement, so this provides the opportunity to boost your retirement funding. Use any salary increases in the last five years to boost your retirement fund, rather than your lifestyle. Re-assess your risk cover: Risk cover is intended to protect you by covering any income gaps to pay for any outstanding debts and provide for your family should you no longer be able to. By retirement, ideally you’ve built up sufficient capital to provide an income, so this portion of risk cover is less important and is only needed for estate planning reasons, such as settling taxes and paying for funeral expenses. However, you should increase your critical illness cover as the likelihood of becoming seriously ill increases substantially as we age. Understand your investment options: When you formally retire, the financial vehicle used at this point will typically be in the form of annuities. Annuities refer to investments that provide a monthly, semi-annual, or annual income. Your decision about whether to purchase a guaranteed annuity income or invest in a living annuity with an underlying investment portfolio will determine how to manage your current retirement funds. Do you need to start moving to more cash-like investments over the next five years or do you stay invested in equities?
Upon retirement, you’ll be able to take a portion of your retirement funds tax-free. You need to decide how to invest this. This can be used to generate additional income, tax-free, if allocated in the correct form of investment.
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