Ignatius Manyando
When you reach 60, the last thing you want to worry about is your retirement. To have a restful, secure and carefree retirement, you must build a financial cushion that will fund your expenses and lifestyle. Benjamin Franklin once said: “By failing to prepare, you are preparing to fail”. This has proven true in many areas of life and one such area is retirement preparedness.
Retirement planning is a multifaceted process, which starts with setting your retirement goals. The plan helps you to achieve the objective and goals you have set for yourself. It will determine your quality of life after you venture into retirement.
Although pensioners, in defined benefit funds such as the Government Institutions Pension Fund (GIPF) enjoy the security of having guaranteed benefits, possible increases in medical and other living expenses due to the coronavirus pandemic may reduce their purchasing power. Just as events like these can show the remarkable benefits of saving for your retirement, it can also highlight the exact opposite. As terrorising as this pandemic has been, retirees who made adequate retirement plans will enjoy a certain degree of comfort because they are adequately cushioned by their retirement savings during hard times. Below are some tips everyone should take regardless of their age to prepare for and build a solid retirement plan that will ensure you have a comfortable retirement.
Start early: Time is your best friend
Your current age and expected retirement age gives you the initial groundwork for an effective retirement strategy. The earlier you start, the higher the level of risk your portfolio can withstand and the longer your savings period will be. The success of your retirement programme is directly determined by the goal of how you would like to maintain or improve your lifestyle during your retirement years. If you wish to travel and make more purchases in retirement, you must save more. How much you will need to save depends on how you want to spend your retirement.
Starting early is not necessarily just about retirement saving. It also includes paying off your debts. You ideally want to pay off of your mortgage, vehicle loans and any other significant debts before retiring. This will help you avoid using your hard-earned retirement income to pay off debt. A common misconception by people is to look at retirement as a far-off future event, thus thinking they still have plenty of time to save. However, this has proven to be the exact opposite. Consider the following, as a young professional, who has just entered the workforce you probably think you still have a long way to go and plenty of time to save. However, be mindful that a 58-year-old who is two years to retirement once felt the same; however, s/he may now find him/herself in a situation where they have not saved enough.
Avoid withdrawals before retirement
Many-a-times you may have to change jobs and one of the immediate temptations is that of withdrawing your retirement savings for cash. Avoid this temptation at all costs. Consider the following: The cost of living increases every year especially health care expenses. You will want to live longer and thrive in retirement. Retirees need more income because they are no longer at work for eight or more hours a day. As a result, we have more time for travelling, shopping, sightseeing, and engaging in other expensive activities. The longevity of your retirement portfolio is greatly affected by your withdrawal and saving rate because it will ultimately affect how much you can withdraw each year. As a member of the GIPF, you have guaranteed benefits for life after retirement. However, if you have invested in a retirement annuity plan that is directly dependent on how much you have saved, you may easily outlive your retirement savings. To avoid outliving your savings, you need to be mindful that the average lifespan of individuals continues to increase due to advancements in health care. Having a future outlook about your possible future expenses is of paramount importance as it will give you an indication of how much more you ought to save. For example, if you anticipate that by the time you retire you will still be paying off your mortgage, or have children in school or university, this is a clear indication that you will need more money in retirement.
To recap, when you change jobs, transfer your benefit to your new employer’s retirement/pension fund. Alternatively, transfer to a preservation fund such as Kuleni Preservation Fund or take out a retirement annuity plan instead of spending it. It has been said that all things being equal, to maintain a similar lifestyle during retirement as you had before retirement, you need an income replacement ration of at least 75% of what you were earning before retirement.
*Ignatius Manyando is GIPF’s Manager: Annuities