Planning for retirement in a risky world

By Janice Roberts

Shreekanth Sing

By Shreekanth Sing, Technical Legal Adviser at PSG Wealth.

Failing to plan is planning to fail, and nowhere is this truer than when it comes to retirement planning. However, even a disciplined and well-advised retirement plan can come under threat due to certain pre- and post-retirement risks. Some of these risks are under our control, others are not.

For example, saving too little is a major risk to accumulating sufficient funding for retirement. However, taking steps early on to ensure you save enough is firmly within your control. So is obtaining proper advice and ensuring your assets are well diversified and invested in suitable asset classes.

On the other hand, illness, a market crash, retrenchment or public policy changes are not within your control. While you can take preventative steps in the case of risks that fall within your control, your best course of action in the case of non-controllable risks is to ensure you understand their potential impact on your portfolio, and have a plan for dealing with them if needed.

Here are some of the most common risks facing retirees in South Africa – and what you can do to mitigate them.

Longevity risk

It is no longer unusual for people to live more than 30 years in retirement. As life expectancy continues to rise, there is an increasing risk that retirees will outlive their savings.

Those who are managing their own retirement funds over a lifetime have to perform a difficult balancing act. Being cautious and spending too little might needlessly restrict your lifestyle – especially in early retirement when you are the healthiest and most mobile – but spending too much increases the danger of running out of money.

Ensuring that you save enough during your working years, investing it appropriately, and thereafter choosing the correct post-retirement investment vehicle, can go a long way in ensuring you have enough capital saved pre-retirement to provide for your income post retirement.

The risk of retiring too soon

Deciding when to retire is a deeply personal decision that includes considerations ranging from health and financial factors to psychological ones. The threat of job losses due to retrenchment is also becoming more common, so ensuring that you take proper advice should you find yourself in this situation is crucial. Unfortunately, many retirees decide to retire too soon from a financial perspective – believing they have accumulated enough for their retirement years. In many cases working only a few more years, even on a contract basis, can have a significant impact on the quality of retirement for the remainder of their lives.

Medical risk

Adequate health cover is a major concern for many retirees, since  unforeseen medical expenses can place a huge strain on your retirement income. Ensure that your financial plan factors in appropriate medical and risk cover in retirement – and commit to a healthy lifestyle while you are still young to reduce your health-related risks in later life.

Public policy risks

Much of the initial focus when it comes to the prescribed asset debate has been on the potential role of prescribed assets in retirement funds, but in reality, the policy is focused on all assets. Investors trying to avoid prescribed assets by disinvesting from retirement funds lack understanding of the possible impact of the full policy position. Any withdrawal from retirement funds could possibly only result in a tax bill without avoiding the investment in prescribed assets.

It is also worth remembering that investment into retirement funds do not attract tax on growth, interest and dividends – which add up to a significant incentive to save in retirement funds over time.

Potential legislative changes are always a risk factor for retirees. However, the main reason why most people are not accumulating enough retirement fund assets is a result of them not saving enough – rather than a result of the returns they are earning on the assets in which they do invest. The best course of action is therefore to continue planning and saving for your retirement – and benefiting from the tax concessions that retirement funds offer to help your investments grow.

Continue to plan, no matter how uncertain the environment

Understanding the risks you are likely to face in retirement can help you to structure a better informed and more robust plan. An accredited financial adviser can help you in addressing the retirement challenges you face.

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