Beware these big retirement risks in South Africa
South Africans face several financially-related risks when they retire, meaning that effective planning is essential.
As one approaches the third major phase of their life after childhood and working years, ensuring financial security is essential as it protects one’s wealth and helps one maintain one’s lifestyle.
Citadel Director and Regional Head: Western Cape, John Kennedy, said that one’s life can be broken up into three distinct periods:
- Active phase: In the early years of retirement, many people remain active, engaging in travel, hobbies, and other leisure activities. This period is characterised by higher discretionary spending as retirees fulfil their bucket list dreams.
- Passive phase: As retirees enter their 70s to 80s, their lifestyles often become more subdued. Travel and large-scale activities may decrease, your lifestyle may become more frugal, and you may look to ‘right-size’ your living arrangements.
- Supported phase: The final phase involves increased health care and support needs. Expenses shift significantly towards medical care and assisted living.
Those who are newly retired or approaching retirement can benefit from looking at three key tricks and making plans to mitigate them to ensure a steady standard of living.
Firstly, there is a longevity risk for people who live longer.
There is a real danger that these retirees outlive their savings.
Thus, planning for at least 30 years post-retirement is essential.
For those who retire at 65, they should plan to live until they are 95.
There is also an inflation risk, as inflation erodes purchasing power over time.
“What costs R100 today might cost significantly more in the future, impacting your standard of living.”
Medical risk also exists; healthcare costs typically rise faster than general inflation, demanding a larger portion of one’s budget.
“It’s important to set aside funds for future medical needs, including enough to cover rising medical aid costs as you get older,” said Kennedy.
What to do
There are several aspects that one must keep in their approach. He said that one should take a balanced investment approach.
“Our investment strategy should evolve with your age. In the early years, a high proportion of your investment strategy should comprise growth-oriented investments.
“As you age, shifting a portion of your investments to shorter duration and more conservative asset classes should help to protect your assets from market volatility.”
“That said, don’t be too risk-averse with your investment strategy. Otherwise, your money may not keep growing at the rate required to sustain your needs.”
“To manage inflation and ensure long-term sustainability, maintain a portion of your portfolio in growth assets, like equities. These investments help counteract the effects of inflation but should be balanced with stable assets like bonds and cash to manage volatility.”
Retirees also need to budget for each phase, mapping out the expenses across the active, passive and supported phases.
For instance, travel and leisure can be budgeted for in the active phase, while more should be allocated for medical expenses in the supported phase.
A simple savings calculation can also be used.
“If you plan to retire at 65 and want to maintain the lifestyle you have become accustomed to when you had an income of R100,000 per month, you might need 200 to 250 times that amount in savings, totalling around R20 to R25 million to sustain your needs until the age of 95.”
Moreover, retirees should enter retirement with as little debt as possible.
All purchases, including houses and cars, should be paid off at the time of retirement.
Finally, one should implement a withdrawal strategy, which determines a sustainable withdrawal rate from one’s savings.
The ideal drawdown rate is between 4.5% and 5% annually, depending on retirement and age.
Kennedy said that this rate should be adjusted based on inflation and one’s specific financial needs.
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