Planning is key in the final few years prior to your retirement. This is a time when you need to pay much attention to your needs and investments so that you can end up enjoying your golden years. Charlene Clayton reports on what independent financial adviser Nigel Scott, from Durban-based company Scott Adkins, told the Personal Finance/Old Mutual Retire Right seminar held around the country last month.
As you approach the final lap to your retirement, it is time to do a reality check and get down to tying up the details.
Up to this stage, it is likely that you have prepared for your retirement planning in broad brush strokes, but attention to detail is what will help you get your planning right in the final stages before retiring, Scott says.
Retirement goals
A reality check on your retirement goals is very necessary. You need to look closely at the big picture, revisit your retirement goals to see if they have changed and then calculate whether you have sufficient capital and resources to achieve those goals.
Take note of the following steps in planning for your retirement:
Step 1: Calculate your expenses after retirement
Work out your basic monthly cash flow after retirement. This will include:
* The day-to-day living expenses that you will incur; and
* Ad-hoc expenses, which typically include the replacement of assets such as your car (when and how many times during retirement you will be replacing your car), travel expenses and home maintenance.
Step 2: Calculate your income after retirement
The next step involves calculating what your income will be after retirement. Determine all your sources of income, including part-time employment, annuity and investment. You then have to use a present-value model and calculate if your capital and income can support your desired lifestyle.
Unfortunately, these models are not available to people generally, but a professional adviser will be able to assist you with the calculation.
Step 3: Lifestyle choices
The next step is to decide on details such as where you are going to live and how you are going to occupy your time. You may decide to do part-time or charity work. Whatever your plans, start making arrangements now.
Step 4: The options
Your options will largely be determined by whether you are employed by a company or self-employed.
* Employed:
If you are in employment, you are probably a member of a retirement fund. Whether you are a member of a defined benefit or a defined contribution fund will determine what your final retirement payout will be.
Before you retire you will have to decide whether to take the tax free one-third cash lump sum from your retirement payout or whether you will buy a pension with the full amount. It is generally better to take as much as you can tax free because the balance remains in the tax net.
Other aspects to consider are how you will be funding your healthcare needs after retirement and the continuation of life cover after retirement to provide capital for any dependants.
If you are taking early retirement and intend to continue earning income in some form, you may not want to receive a pension from your retirement fund immediately. You may have the option of withdrawing from your company retirement fund and moving your money into a preservation fund.
Preservation retirement funds are there to preserve your retirement savings and any tax benefits you have accumulated until you are ready to draw a pension.
Scott cautioned, however, that withdrawal from a retirement fund, as opposed to going on pension, may carry with it other consequences. One of them is the loss of the medical aid subsidy from your employer.
You need to take into account termination benefits such as gratuities or bonuses due to you. You should realise that these are taxed different to normal income.
Other factors to consider are whether you have share options and the right to buy or acquire company assets such as your company car.
* Self-employed:
If you are self-employed, succession planning and your exposure to sureties and other security you may have provided are important aspects to consider.
Banks have long memories. An unlimited surety signed when you started your business can be a great risk even after retirement if you do not arrange for it to be cancelled.
You must ensure that you have an exit strategy from your business. Normally, you have three options: You can sell your business outright, either to a third party or a partner; you can retain your equity and appoint a manager to run the business; or you can stay in the business but scale down.
More and more people are choosing to scale down their involvement in their business after retirement and make arrangements for the business to be wound up after their death.
Step 5: Tax consequences
After evaluating your options you need to consider the tax consequences of each separately, but, Scott warns, you should not make your retirement plans based solely on tax considerations.
Your tax planning must fit your lifestyle goals. Remember, too, that what you need in retirement is cash flow and not income.
There are a number of tax concessions available to retirees, including a tax-free portion of lump sum benefits from a retirement fund, the tax-free portion of benefits received when you leave the services of your employer and the taxation of the taxable portions of these benefits at your average rate of tax.
For the time being, it is possible to manipulate your income in the two years prior to retirement to bring down your average rate of tax.
Another useful tax tool is a matured endowment. The regular cashflow from a matured endowment does not attract income tax in your hands and can be an effective way of supplementing your post-retirement income in a tax-efficient manner.
But, Scott says, it is possible that certain of these concessions may not be available for much longer because the government has announced that the entire tax dispensation of retirement funds and benefits is to be revised within the next three years.
Also, avoiding tax now to pay tax later is not always the best strategy because the tax rates may be higher at a later stage.
Step 6: Other important issues
* Type of annuities: You will need to assess whether a conventional annuity (where the life assurer guarantees you a monthly pension until you die, but any capital dies with you) or whether a living annuity (where you take the investment risk) is more suitable for your needs.
* Investment decisions include deciding how to allocate your money between the different asset classes and deciding how much should be invested locally and how much to invest offshore. Your asset allocation will be very different if you plan to retire in South Africa than if you plan to retire to an overseas country where your costs after retirement will be in a foreign currency.
* Risk is another aspect to consider when making investment decisions. You should not make any investments until you have determined whether you can sustain the investment risk associated with investment strategies you are considering.
Professional help
Planning for your retirement is a very important process in your life - do you want to go it alone?
Scott says a professional financial adviser should be able to give you a planning process you can understand. Your adviser should be able to explain all the costs and charges of the various investment options and provide you with ongoing service and advice.