Six things to consider before retiring
Many people want to retire at age 60 in the hope that they will still be fit and healthy enough to enjoy an active retirement. While there’s a lot to be said for early retirement, it’s important to keep in mind the potentially long retirement period you’ll need to fund and the myriad of contingencies you could face over a period that could well be 40 years old.
Here are six things to consider before retiring.
1. Your income after retirement
When it comes to determining an appropriate retirement income, we advise you to avoid using rules of thumb. Every retiree faces a unique set of circumstances that must be carefully considered before arriving at a retirement income that best suits their needs. Although many expenses, such as bond repayments and retirement funding contributions, disappear in retirement, it is important to carefully consider the additional expenses you may face during your retirement years. The increase in health care costs as one ages is well documented. There are other important factors that can drive up your expenses after retirement. For example, if you have adult children living abroad, the costs of international travel will need to be factored into your budget, bearing in mind that these expenses would be capital in nature and are unlikely to be funded by the income from your pension. Also, assuming active retirement is important to you, you’ll need to budget for the costs of any interests, hobbies, and sports you plan to pursue, as there’s no point in realizing after retirement that you don’t. don’t have enough money for these things.
2. Your sources of retirement income
The next step is to take stock of the investments you have planned for retirement and to fully understand their mechanics. In doing so, you need to consider when you will be able to access the funds, how much cash you can withdraw, the specific rules for each investment, your retirement options and how you will be taxed. The pension fund industry is highly regulated and complex, and a number of critical decisions need to be made quickly and in the right order to avoid making costly mistakes. Understanding where and how you are invested in the year before retirement is essential to ensure that your investment strategy fits into your retirement timeline, bearing in mind that you may need to make adjustments to your investment strategy in order to achieve your stated objectives. Most pre-retirees have a mix of retirement funds and discretionary investments in place in retirement, and understanding how these investments will be taxed is key to developing a viable strategy. Remember that many of the decisions you will make in retirement are one-time, irreversible decisions that you simply cannot afford to make wrong. No investment should be viewed in isolation from another, so find an advisor who can take a holistic view of your entire portfolio to provide retirement, tax and estate planning advice that fully supports your goals.
3. Investment risk
Transitioning from income to income requires a massive psychological shift and while you may be tempted to adopt a more conservative investment approach in an effort to preserve your capital, beware of investing too conservatively to your time frame – bearing in mind that you have a potential time frame of 40 years which, by investment standards, is considered long-term. Exposing your retirement nest egg to higher risk investments will increase the likelihood that the value of your wealth in real terms will keep up with – and ideally exceed – inflation, meaning your invested capital will continue to grow over time. time, even if you tap into this. If your capital is too heavily weighted in cash and bonds, you may struggle to earn sufficient investment returns to keep pace with the cost of living, which, in turn, can lead to cash flow problems later on. retired. While short-term market fluctuations can cause some discomfort and unease, don’t lose sight of your timeline and the long-term nature of your overall plan.
4. If you can afford to retire
Once you have determined an appropriate retirement income, the next step is to determine if you have sufficient investment capital to provide that income. This process – ideally conducted with an independent retirement advisor – should involve developing a number of retirement scenarios using a set of stress-tested assumptions, including assumptions about your expected life, investment returns, inflation, medical inflation and potential capital. expenses. Understanding the potential expenses you might face at different stages of your retirement is key to developing realistic scenarios. For example, one might reasonably expect to spend more on travel in the first decade of retirement, with these costs decreasing as you age and lose mobility; while on the other hand, your health care costs are likely to rise faster in the last decade of your life. This means it’s not only important to get the right levy levels, but also to plan for the possibility of capital expenditures during retirement, such as paying for a wedding, buying a life-right unit, or funding renovation costs. or home modifications.
While early retirement may seem idyllic, think carefully about how you’ll fill your day, every day, potentially for the next 40 years. Going from a hectic, goal-oriented schedule to a blank planner might sound appealing, but the reality of finding enough to keep you busy all day, every day can be daunting. Additionally, a lack of purpose can not only lead to boredom, but can also affect self-esteem and identity. Depending on your experience, qualifications and industry, it may be difficult for you to re-enter the workforce after retirement. So you have to be absolutely sure that a life without professional commitments is exactly what you want. If you held a paid job until retirement, your professional personality will be an integral part of who you are, and many retirees struggle with losing their professional identity, not to mention engagement with peers and camaraderie. at work.
6. Retirement home
If you retire at a relatively young age, the family home may still be adequate for your needs and you may be physically able to maintain and maintain it. Realistically, however, your retirement housing needs are likely to change as you go through the different stages of your retirement. With the high cost of decent retirement accommodation – coupled with long waiting lists – it is advisable to start thinking about your future retirement accommodation as early as possible.
Retirement villages – many of which are structured on the basis of the right to life – have grown enormously in popularity in recent years, largely due to their convenience and advantageous cost structures. With high crime rates, many retirees find comfort in the safety and security offered by such developments – and naturally, access to assisted living and fragile care remains a major draw, although such facilities have a price which if not budgeted for in the pre-retirement planning phase is likely to be unaffordable for the average retiree.
Most retirees worry about becoming a financial or physical burden on their adult children, but the reality is that if you haven’t budgeted for a realistic long-term health care plan, live with and/or be taken supported by your adult children may be your only option. If the equity (or part of it) in your primary residence is required to fund your retirement, when to sell the asset is another important decision to make. As with investment markets, real estate markets fluctuate over time and will largely determine the value you can extract from the asset. Many retirees make the mistake of keeping their family home longer than necessary for sentimental reasons, which can lead to a sale at the wrong time and a reduced retirement nest egg.
As can be seen from the above, retirement planning is multi-faceted and all-encompassing and should be undertaken with the guidance of a retirement planning expert to ensure that decisions are made in a timely, sequential and appropriately.