The keys to living in retirement - as opposed to just surviving it - are to find a financial planner, have a financial plan and start saving now, Roland van Alphen says. Van Alphen, a chartered accountant and a financial planner with Precedent Financial Services, was the speaker at a recent meeting of the acsis / Personal Finance Investors Club in Johannesburg.
There are several challenges facing you during retirement, and how you rise to these challenges will determine your quality of life, Roland van Alphen says.
One of the biggest challenges facing retirees is the relatively long period of time they will spend in retirement, he says. People are retiring at a younger age and are living longer. As a result, your retirement savings have to last much longer than in the past.
Van Alphen says you need to plan for your retirement years. Importantly, you must stick to the plan and never lose sight of your objectives.
Approaches to planning
Van Alphen says there are three approaches to retirement planning:
- You can do your planning and investing yourself - this means you must rely on your own expertise;
- You can buy an investment product, such as a retirement annuity, or a range of products to provide for your finances in retirement; or
- You can find a financial adviser, who will help you to draw up a financial plan and an investment strategy.
Selecting a financial partner
When selecting a financial adviser, you must decide whether you want someone who will simply conduct transactions on your behalf, or someone with whom you want to build a relationship. If you want the latter, you should choose a financial planner who provides personalised and customised planning, ongoing service and advice, expertise across all disciplines, someone who thinks ahead and who can help you meet your needs during retirement.
Van Alphen says financial planning and investments costs could amount to about 2.25 percent, excluding VAT, of the investments that you make. You should take these costs into account when you determine the real returns you require to sustain your lifestyle in retirement.
There is nothing wrong with paying for financial advice if you are getting value for money, Van Alphen says. Your financial planner must be able to demonstrate that his or her advice is, in fact, adding value.
It is better to get more value for your money than to pay reduced fees, he says.
Creating a financial plan
Van Alphen says the building blocks of a financial plan for retirement are:
- Calculating your desired cash flow during retirement;
- Drawing up a lifestyle "wish list";
- Working out how long your money must last;
- Assessing your current mix of assets; and
- Calculating your expected future capital expenditure.
During your working life, you will have to make trade-offs between spending your money then or saving it for your retirement, Van Alphen says. You may have to reduce your spending during retirement if you do not save enough during your income-earning years.
If you reach retirement with insufficient capital, you may have to:
- Reduce your capital expenditure;
- Postpone your retirement; or
- Reduce the legacy you would like to leave to your beneficiaries.
Another trade-off you have to make when building your retirement capital involves the risk and returns of your investments, Van Alphen says. You may have to invest your assets more aggressively to get the required returns - and you must understand the risks involved in such a strategy.
A unique plan
No two people will have the same financial plan for retirement, Van Alphen says. But any plan should be based on three pillars: your lifestyle goals, your investment strategy and your planning strategy.
He says financial planning strategies are often overlooked. A lot of value can be added, for instance, by careful tax planning within your retirement plan.
Political, economic and legislative changes take place all the time and your plan must be adapted to take account of these changes. Any change in your financial or personal circumstances should also trigger a review of your retirement plan.
Common mistakes
Van Alphen says people often make the following mistakes with their retirement planning:
- Procrastinating. Every day that you don't make a decision, is an opportunity lost.
- Failing to make provision for life and disability cover.
- Failing to provide for medical expenses in retirement.
- Failing to provide for short-term insurance needs in retirement.
- Not planning where you want to live during retirement. The later you leave this decision, the more difficult it may become to live where you want. For example, a couple wanting to move to a retirement village may face a long waiting list.
- Underestimating the lifestyle changes that retirement will bring about. For example, people retire with two houses, two cars and a boat, and within five years, are down to one house and one car.
What to do
Van Alphen recommends that you do the following to avoid the common planning and investment mistakes:
- Define your financial objectives (it helps if you write them down);
- Work out a budget for your retirement, and be disciplined about sticking to it;
- Understand the risks and consequences of your decisions (for example, it would be unwise to buy a holiday house with your last R1 million);
- Accept the financial changes that retirement brings about; and
- Accept that your capital will be depleted. Unless you are very wealthy, it is impossible to maintain all your capital until the day you die.
What not to do
Van Alphen says the "don'ts" of retirement planning are:
- Don't stand surety for family or friends - more people have been sunk by doing this than anything else;
- Don't put your finances at risk to fund your children;
- Don't use your retirement capital to start a business in an industry you know nothing about;
- Don't be tempted to "bet the farm" on an investment scheme;
- Don't neglect your health - staying healthy is one of the easiest ways to keep your expenses down; and
- Don't overspend.
Conclusion
Van Alphen says there are three key aspects to retirement:
- The medical. You should exercise regularly and go for check-ups.
- The psychological. Accept the changes that retirement will bring about. It is also vital that you have a hobby to keep you occupied.
- The financial. You need a tailor-made financial plan.