Everyone knows that saving for your retirement is good for many reasons, such as not having to depend on social grants or your family, and sustaining the quality of the life you’re leading. However, many people think that once they retire there’s no need to continue saving. However, life doesn’t stop at retirement and you may still have decades of life to enjoy.
In this article, we find out why you need to save after retirement and how you should go about doing that.
Tip: Calculate how much you’ll need for your retirement by using our retirement calculator.
Why do you need to save?
Other than the basics, such as food, there are a number of expenses:
Medical bills – We all know that old age can come with health complications. You don’t want to get caught off guard when you get sick. It’s important to have a medical aid plan that will help you pay your medical bills in case that happens.
Travelling – You may want to explore the world when you retire. Putting money away will help you achieve that dream.
Mortgage – It might be that you haven’t paid off your mortgage by the time you retire, so you might need to put money towards that.
Funeral costs – After retiring you still need to think about how your family is going to bury you when your time on earth comes to an end. Saving for your funeral expenses is saving your family from the burden they would otherwise have to carry when you die.
This is far from a comprehensive list, but in short, the quality of your life should not drop because you have retired. With careful planning, you can maintain it.
How to save after retirement
Start retirement sustainably: According to Kiru Padayachee, business development manager at Glacier by Sanlam, as you approach retirement, you need to speak to your financial adviser about the amount you’ve saved compared to the amount you’ll need to live on. After this, you must make decisions around your retirement budgeting accordingly.
“You may need to cut back on your pre-retirement expenses, or consider a part-time job in your early retirement years. It’s critical to have sight of this early into your retirement, so that you can put a sustainable plan in place,” says Padayachee.
Apply the 4% rule: According to Padayachee, the 4% withdrawal rule is the guiding benchmark that’s used globally by pension funds.
“By withdrawing 4% of your capital per year in the first few years of retirement, you should leave enough of it to continue to grow, ensuring its longevity,” says Padayachee.
He says with this formula, you’d be able to set yourself up for the next 25 years.
Be intentional about eliminating debt (and avoiding new debt): Do this so your retirement income isn’t encumbered by outstanding debt, like student loans, cars, and houses, in your golden years.
“A guide is to reduce your total debt by paying it off in set increments for each year leading up to your retirement,” says Padayachee.
He gives the following example:
If you have R20,000 in debt, aim to reduce your debt by R5,000 each year in the four years leading up to your retirement, so that by the time you retire, your debt balance is zero.
“Once you’re in or nearing retirement, reducing debt becomes increasingly critical – and taking on new debt is to be cautioned against. Ideally, your retirement income should go towards living expenses rather than servicing debt costs,” says Padayachee.
Draw up a retirement budget: This is an essential tool for helping you plan for the next chapter of your financial life.
“Critically – and perhaps most uncomfortably – your budget will likely need to decrease into your retirement, since not many of us are able to increase our income into our retirements,” says Padayachee.
Where can you save your money after retirement?
According to Padayachee, you have various options available to you for sustaining your retirement funds, depending on your income.
If you’re a middle- to high-net-worth retiree, a living annuity is for you. Padayachee says it gives you market exposure, which means, depending on its composition, it’ll be invested in funds, whether it’s unit trust funds, shares, exchange-traded funds, or index funds.
“If you have too little retirement capital, then this is not the vehicle to be in because of the uncertainty of the way that it will earn its returns,” says Padayachee.
If you’re a middle- to lower-net-worth retiree, life annuity is for you. Padayachee says it offers the certainty of a fixed monthly income, with no exposure to markets. This eliminates the pressure on you, the annuitant – but because the rate applies for as long as you are alive, you can’t benefit from market movements, or any increase in the interest rate.
According to Steven Nathan, CEO of 10X Investments, choosing between a living annuity and a life annuity at retirement requires a careful evaluation of your personal needs and circumstances.
“It is a critical decision with potentially lifelong consequences. The key difference between the two is flexibility, says Nathan.
With a life annuity, you are bound to your service provider, and to a predetermined income, for the rest of your life.
“While this might at the outset feel more secure, over the long term it can penalise you, especially if you take into account that your retirement lifestyle will not be a constant. You may still be very active in your sixties and seventies, incurring travel and recreational expenses. You may thus require a higher, more flexible income initially, with a lower but more secure income later on,” says Nathan.
What about a living annuity?
According to Nathan, a living annuity helps you accommodate these realities by allowing you to choose your own investments and income.
He says you must be careful because this flexibility brings risk and responsibility.
“The responsibility aspect involves making decisions that will determine the level and sustainability of your pension and lifestyle; and the risk is that these decisions, if uninformed or misguided, will fail to secure you an adequate income for life,” says Nathan.
For more on how to choose a retirement plan, click here.