YOU have worked hard over the years, you think you saved enough for your retirement, and you now want a deserved break that is free of work stress. Unfortunately for many Namibians, the end of a stressful working environment is the beginning of financial stress that kills faster than work related stress. It is painful to see so many employed people, including career politicians, reaching retirement age while still stuck in a vicious cycle of indebtedness and many are in a debt trap that takes them to the grave. Despite earning a stable and decent income over their active working years, many people have to retire with negative cash flow and negative net worth (liabilities and debts exceeding value of all assets).
As you approach retirement age, your retirement is something you must look forward to, as you will have more time to relax and more time to spend with your family and friends, but remember along with more free time may come a drop in income, and you may unfortunately have to lower your standard of living. Even if you have accumulated a reasonable income from your pension, it may not be enough to keep up with rising costs of living over the remaining part of your life. The focus of this week’s article is to provide you with the necessary tools to assist you to manage your retirement income.
Living within your means after retirement
I have over the years observed a pattern in the behaviour of retired people, especially the so-called previously disadvantaged people as the majority of them tend to have unrealistic expectations upon retirement – some expect to double returns from their lump sum investment within a year, some start and want their new business to generate surpluses within a short period. In terms of our current pension fund laws and rules, when you retire from your formal employment, you will receive 33 percent of the total amount of what you accumulated in your pension fund account in cash and the remaining balance of around 67 percent will be re-invested and you will be receiving a monthly payout based on a formula. For many people this will be the first time to receive such a big lump sum of money and because of excitement, they end up buying assets that depreciate in value, rather than putting the money in income-generating assets.
I recall some years ago advising someone retiring not to invest his lump sum payout in a business that he believed was going to produce massive profits for him within a short time. Although in his 60-year life he never attempted even operating a taxi business, the lump sum looked so much he did know what to do but to start a business and turned down my advice of clearing some outstanding debts and packing a substantial portion of his lump sum money in less risky, but income-generating assets.
In addition the type of business he was entering was oversupplied, competition was cutthroat and I knew he did not have the skills and capacity to break through in that space. Within two years of starting this business he was broke, the business closed, he was more in debt and his house that he paid off while still working was on the verge of being repossessed. Although he retired a very healthy gentleman, his health deteriorated to the point where he now needs to be cared for and has become a burden on the country’s health system. Eating the pension payout lump sum is one of the biggest mistakes many people who retire make and it has proved disastrous for many.
Boost your retirement income with your house
If your retirement income is not enough to supplement your post-retirement life style, you may consider converting your house into an income-producing asset. Why should you suffer financially and get into depression and health problems if you have a paid off house that you could sell and generate the cash that you could invest in less risky assets to supplement your retirement income. One option to boost your retirement income is to put your house out for rent and move to a cheaper town and place. Selling the house also makes sense, but many people are emotionally attached to their family home and don’t want to sell their only property, since it could be the only asset they will transfer to their family after their death. Although a house you live in is indeed an asset, it doesn’t produce money, but it eats money. Even if you don’t have an outstanding mortgage on your house, living in your house after retirement costs a lot of money, since you will need to pay rates and taxes, water and electricity bills for the whole house and other house related expenses. You might also have to factor in major periodic house maintenance and repair costs. The additional expense is okay if you have an adequate retirement income, but for many retirees, these additional expenses will push you further into a negative cash-flow position, and result in financial stress. You are therefore better off finding a nice, cheaper place to rent while leasing out your house to boost your retirement income. Should you decide to sell your house, you can reinvest the money from the sale of your home and this should be enough to help you maintain a well-deserved retirement free of financial stress and poor health.
Consult professionals
Many people commit these mistakes because they are not well advised or are ill advised. You may find that by seeking professional advice from those who understand money matters better, is probably the best investment you can make for your retirement. In my experience I have seen the positive impact on the financial position of those that somehow implement informed advice from professional consultants on money matters. A good example is that of an NDF soldier who lost his job some years ago and was excited to get his pension payout that looked big at the time. Upon receiving his pension payout, he decided to pay off the outstanding balance on the house, and use the remaining balance to start a business. Before implementing that decision he contacted me and upon reviewing his family’s financial position and taking into account his age, health status, and future goals, I advised him not to pay off the balance on the house, because the monthly installment was very low even in the absence of a subsidy. I also advised him not to start a business he was interested in, because my market research pointed to the fact that the business could only generate profit by year three and in these three years he was going to face a negative cash flow and for an unemployed person without a regular monthly income that was going to be a financial disaster.
I advised him to put out the house for rent, and to relocate to his hometown where the cost of living was much lower. And after determining his monthly expenses and income requirements, we invested his pension payout in a way that would ensure that the returns on investment would support his monthly income requirements without affecting the capital or principal significantly. The rental from the house was enough to cover the monthly installment with a small surplus. Part of my advice to him was to use the time to upgrade his skills, since he was still in his late forties and had many years of military skills and experience. A few years down the line he finished some extra courses and early this year he secured employment in government. His retirement payout remains intact, his house is paying itself off with two years remaining, and he is building a new pension fund from his new job and with 11 years remaining before his retirement age, he will have built enough savings to complement what he has in his investment account.
Although it may be difficult to accept someone’s advice, many people find themselves in worse situations because of the decisions they made at a point in time in the past, so make sure you are attached to those with knowledge on money matters. Visit this column next week as we continue to bring you more topics on how to manage your retirement pension payout.
• Martin Mwinga works for First Capital Treasury Solutions and can be reached at mwinga@firstcapitalnam.com