10 Solutions to things that threaten your retirement
You could be doing all the right things to securing your retirement and living you’re your golden years in comfort and style. But there a things that could derail your well thought out retirement ambitions. In some cases you won’t even see these threats coming.
But there’s a saying that goes ‘life happens’ – and there certainly aren’t any guarantees. Angelique Ruzicka finds out from Craig Torr, director at Crue Invest how some personal choices can blind-side retirement dreams.
Most couples in their 40s and 50s don’t anticipate divorce, but marriage often end in divorce at this age. “Irrespective of a couple’s wealth, a divorce can have catastrophic effects on retirement planning. A divorce later on in life disrupts financial independence and can impact lifestyle choices,” says Torr.
A divorce now means things like joint overseas travel, vehicle upgrades and a retirement income sufficient to support a combined lifestyle would need to be recalculated for each person.
- Bear in mind that you will be responsible for more expenses on your own once the divorce has been concluded. Draw up a budget to see how you can best deal with expenses such as rent/home loan, rates, water, electricity, landline and non-consumables.
- Torr says it’s important to assess the assets each will acquire in the divorce settlement. “Although the asset split is deemed to be equal in value, ensure one partner is not left with illiquid assets that cause cashflow problems later, e.g., where one spouse keeps the retirement annuity valued at R 1 million, and the other is awarded money market funds of R1 million, the funds in the RA cannot be accessed until age 55.”
- Consider the costs of divorce and see if you can come to an agreement before things turn ugly. “A contested divorce can cost anything from R10 000 to R500 000 if the court action drags on, whereas an uncontested divorce can cost as little as R4 000 depending on complexity. Before heading to the courts in a contested divorce, our advice is to first seek a mediated divorce, with the costs of a mediated divorce estimated to be about 70% lower than a protracted, litigated divorce,” says Torr.
- A second home (holiday home)
The thrill of owning a second home is often replaced by anxiety once the reality of funding a second home from a reduced retirement income sets in. Make sure you time the sale of the property correctly. “Being forced to sell a second property at an inopportune time can result in your nest egg being compromised. If the holiday house was purchased after October 2001, you would be liable to pay Capital Gains Tax (CGT).”
Tip: Factor CGT, agent’s commission and other related costs when calculating the proceeds of the second property into your retirement plan.
- Your choice of retirement home
Aside from remaining in your own home, the main purchase options available to retirees include Sectional Title, Share Block Schemes and Life Rights, and it is imperative to consider the financial implications of each transaction when putting a financial plan together. Affordability, lifestyle goals and retirement income all contribute to making the decision.
Tip: “Before committing to any of these purchase schemes, our advice is to compare a number of developments in terms of the services, facilities and costs. Ensure that you understand exactly what services and facilities you are buying, and what additional levies and costs you will liable for in the future,” says Torr.
- Financial support to adult children
It’s only natural that you want to help your children out. But doing so could put you on the back foot and into debt before your retirement putting you and your children under financial pressure.
Tip: Torr says to reduce the risk of dependency but enjoying the pleasure of spoiling adult children, don’t take on any recurring expenses. “Many parents choose to help their adult children with the purchase of their first car, the set-up costs of new digs or the cost of a family vacation. These assist adult children without committing to ongoing financial support.”
- Longevity and medical enhancements
Medical enhancements have extended average human longevity, but the knock-on effect is that people are spending more time living with often debilitating conditions and/or disabilities.
Tip: Make sure you have cover for these medical expenses well into your retirement. Get advice on the right type of insurance for you. “From a financial planning perspective, we always work towards a life expectancy of age 100 of the younger spouse or partner as one of the greatest risks to a retirement plan is that the client outlives his capital,” says Torr.
- Starting a business
When you get paid out a lump sum on retirement you may be tempted to start your business. However, few create much wealth out of it. “As enticing as it may be to dabble in an exciting new business venture or try one’s hand at innovation, the truth is that very few earn what they would have earned if they’d simply kept their funds invested,” says Torr.
Tip: Do not access your retirement capital to fund your business start-up. “The capital needed to fund one’s retirement, allowing for an extended life expectancy, inflationary increases and increased medical expenses (which generally outstrip inflation by around 4%), should be ring-fenced and secured,” advisors Torr.
- Giving away too much, too soon
You may want to help out family, friends or charities now that you are retired with fewer obligations. But this could put financial strain on you or even push you into debt.
Tip: “Careful planning with a financial planner who has an in-depth understanding of South Africa’s Donations Tax legislation is essential before making any decisions to give away assets while still alive. A financial planner needs to ensure that your retirement plan is resilient enough to withstand the donation, leaving room for variation in the underlying assumptions used when developing the plan, such as life expectancy, inflationary increases, medical costs and large unforeseen expenses,” says Torr.
- Investing too conservatively
You may feel nervous about investing and want to protect your savings. However, investing too conservatively for retirement, although they have a long time horizon in which to achieve their goals, could result in you not achieving your retirement objective.
Tip: “Choose an investment strategy that achieves a balance between your desired investment returns, your personal tolerance for risk, the tax deductions legally available to you and your investment horizon. Appointing an expert multi-manager to your funds entails giving a clear investment mandate to a professional investment company to invest your funds on your behalf, whilst taking into account the optimal balance you wish to achieve,” recommends Torr.
- Retirement scams
Scammers use fear and greed to their advantage. Common scams are Ponzi and pyramid schemes, advance-fee” or “419” scams. Operators of these schemes prey on retirees who are fearful that they don’t have enough money saved for retirement, or anxious to earn greater returns than their investments are currently achieving.
Tip: “Any investment fund must be registered with the Financial Services Board or their local equivalent as an authorised financial services provider. Be cautious of any business that does not have a registered physical address or website presence, or that has contact details that include Gmail, Hotmail or Yahoo accounts, with no physical address or website presence. Be suspicious of any investment opportunity where you are being aggressively pursued to participate. Complex commission and incentive structures are a trade-mark of these scams. If you don’t understand the business model, walk away,” says Torr.
Inflation can really eat away at the interest and even capital saved in retirement. Most retirement plans allow for living expenses to increase annually in line with inflation and do not account for the fact that medical inflation outstrips CPI year-on-year by about 4%. Electricity prices in South Africa have increased by over 300% since 2004, and this trend is likely to continue, with some estimating that increases will continue to be between 15% and 25%.
But there are plenty of other things that contribute to inflation. “South Africa is undergoing political and economic turmoil at present, and our recent downgrade to junk status could have an effect on inflation over the medium term,” points out Torr.
Tip: Budget for these increases as well as frail care and assisted living. “Ensure that there is fat built into your retirement plan that allows for a higher rate of inflation,” says Torr.