Five common mistakes to avoid when planning your retirement

By Bjorn Ladewig, Head of Distribution at Just SA

Bjorn Ladewig, Head of Distribution at Just SA

When you’re ready to retire, one of the biggest decisions you’ll face is choosing an annuity to provide you with a regular income in retirement. Considering the unpredictability of investment markets, increased longevity and a crowded retirement product market, it’s not an easy choice. Yet the stakes are high and the consequences far-reaching. 

Even worse than worrying if you’ve saved enough for retirement during your working life is running out of money after you have already retired. In fact, research from Just SA has shown that 60% of people in or approaching retirement lack the confidence that their income will cover their monthly expenses throughout retirement. 

Our experience has seen retirees make the same errors time and time again when it comes to important decisions about retirement income. Specifically, there are five common mistakes that you should try to avoid. 

#1 Underestimating how long you will need your retirement income to last  

Longevity is an accelerating macro trend, with World Economic Forum (WEF) research revealing an average life expectancy of at least 100 for those born after year 2000[1], which is more than a decade longer than their parents’ generation and two decades longer than their grandparents.

To help protect and thus stretch your retirement income further, it’s a good idea to ensure that your essential spending is covered with a guaranteed, sustainable income for the rest of your life. You should also be sensible with any other assets and investments you may have. For example, if you are drawing more than 4% from these assets, it may not be sustainable for life. Finally, where possible, a side hustle or freelance work is a great way to bolster your retirement income.

#2 Putting too much value on flexibility 

Many people choose a pure living annuity as their retirement income solution for its perceived flexibility. However, you should not forget that this flexibility comes with increased risk. Research has shown that the majority of people in and approaching retirement don’t want to take risks with their retirement fund money (65%) and many cannot afford to lose any money at all (38%). Yet living annuity products – where you are fully exposed to market turmoil – are still the most popular choice.  

#3 Placing too much importance on a capital legacy 

As in life, there are trade-offs in retirement. Having an income that lasts and leaving a legacy are often opposing ideas. Practically speaking, choosing the ‘wrong’ annuity product so that you can provide for your dependants could mean that you end up dependent on them instead. So rather than being conservative in order to leave money to heirs, we suggest you rather focus on reducing your risk of depending on your loved ones later in life. The best way to do this is with a retirement income that is guaranteed to at least cover your essential expenses.   

#4 Believing it’s all or nothing 

Most people think you must either put all your money in a living annuity or a life annuity, but this is not true. You can mix the two with a blended annuity approach i.e. a combination of retirement solutions that provides income for life, flexibility and the opportunity to leave a capital legacy. Income from the life annuity component gives you sufficient peace of mind and liquidity to fund your essential expenses for day-to-day living. The remaining living annuity assets can be invested to provide long-term capital growth. 

#5 Going it alone 

Without an accurate understanding of your current financial situation and retirement needs, it is almost impossible to set realistic and achievable financial goals, let alone work towards them. Just SA research shows that only four out of 10 pre-retirees and retirees use – or intend to use – the services of a professional adviser, yet over half have not yet calculated how much they need each year to live off in retirement.

We strongly recommend that you compare product features and pricing of available retirement solutions with the support of a trusted, independent specialist, so that you can make informed choices. This will also help to close the gap between the expectations and reality of retirement.

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