In the seventh article in our series on the Old Mutual/Personal Finance Retire Right seminars, independent financial adviser and radio talk show host Lionel Karp advises you on how to manage your finances as you enter retirement.
You will benefit financially if you "stagger" your retirement, Lionel Karp says. And the longer you delay retiring - and continue to earn and save - the more likely it is that you will retire financially secure.
Planning for retirement is not just about setting financial goals, Karp says. It also concerns defining the kind of lifestyle you want to lead when you stop working.
Retirement planning is also becoming more complex. There are a range of issues to consider, from medical care to the age at which you retire.
Financing your retirement
Karp say the core issues you must keep in mind when planning for retirement are:
- Certainty of income.
Once you retire, you will no longer have a business or employer on which you can rely to cover your financial needs.
You need to have all your benefits in place before you retire, and to establish whether you have enough money to enjoy a financially secure retirement. To do this requires sound planning and the help of a good financial planner.
The first step in planning is to decide what kind of lifestyle you want to have when you retire. From there, you must establish what you have saved and determine the return on your investments you will need in order to enjoy the lifestyle you want.
The required investment return will indicate what type of investments you should make as well as the risk you will be taking. If the risk is too high, you will have to rethink the kind of retirement lifestyle you want.
- Flexibility.
You need to know how much flexibility you have in planning for retirement. For example, can you change your retirement date? Do you need to continue to pay contributions to a retirement annuity fund? Can you reduce or stop contributing to a retirement annuity (RA)? How will you meet an increasing cost of living when you retire?
- Scalability.
You need to know how you can increase your retirement benefits, particularly in retirement, to counter inflation. You should consider retirement funding vehicles, such as a retirement funds, and non-retirement funding instruments, such as endowment policies. Each of these has different tax implications.
Karp says you need to be very careful about when you invest, the products you invest in, and when to mature investments, at retirement.
Every savings vehicle comes with a different set of tax consequences. For example, you could use a mature endowment policy to provide you with an income, while delaying the payout of a retirement annuity in order to lower your income and your average rate of taxation. Your average tax rate is used to determine how much tax you will pay on a lump sum from your retirement fund or RA.
The important thing is to stagger the retirement dates of your retirement savings to get the best tax advantage using mature endowment policies and retirement annuities.
- Protection.
You need to ask yourself what will happen when you die. Do you need to protect a spouse or other dependants? What are the ramifications if you emigrate? What will happen if your spouse remarries and leaves everything to his or her surviving spouse?
Medical care
Karp says currently you can expect to pay, on average, about 12 percent of your income on medical scheme contributions. But medical scheme contributions will absorb a growing share of your income because medical inflation is, on average, increasing faster than most incomes.
If medical scheme contributions increase by a mere two percent more than your income by 2011, 14 percent of your income will go towards medical contributions. If contributions climb six percent more than income increases, then you face paying almost 20 percent of your income on medical scheme increases by 2011.
In addition, more employers are limiting their subsidies on medical scheme contributions for retired former employees.
Karp says you should also not be lulled into a false sense of security by the fact that after the age of 65 you can claim all your medical expenses against tax. "You first have to pay everything and then claim back at the end of the tax year."
Couples
Karp says sharing retirement is more than "deciding who cooks and who takes out the trash. It is about making the most of financial opportunities and savings".
For instance, you take advantage of the R10 000 in tax-exempt interest earnings that each taxpayer over the age of 65 may claim. (For people under 65, the amount is R6 000.)
While it is acceptable for a couple to draw up separate retirement plans with their financial advisers, they must know how their respective plans fit together.
Choosing where you live
Karp says you should think carefully about where you will live when you retire. As with all property, the main consideration is location - and location becomes even more of a factor in retirement. For example, where will your home be in relation to that of your friends, doctor or dentist?
Don't automatically reject the idea of going into a retirement village. Today, most retirement villages strive to provide a good quality of life.
However, you must understand the financial implications of buying in a retirement village. For example, will you have full ownership rights, or a life right, where you own the property only for as long as you live?
Other articles from the seminar: