Retirement matters - to everybody. Generally, it is our biggest asset and one we spend years and years accumulating. It is no surprise therefore that there are a lot of decisions to be made with regards these savings as we draw near to retirement – decisions which have long-lasting impacts.
Making these decisions at the best of times is daunting – but against the backdrop of Covid-19 it’s an even more intimidating task and understandably, people are feeling very vulnerable regardless of the retirement savings they have accumulated.
At the fourth Take 5 event hosted by Maya Fisher-French, independent financial commentator, we explored how best to navigate a smoother retirement in the challenging ties we find ourselves.
To listen to the full conversation about retirement in the time of Covid-19 as well as opinions about prescribed assets and financial emigration, go to Google Podcast, Apple Podcast or Spotify. You can also watch the webinar on YouTube. Alternatively, continue to the summary below:
What should you do if you are preparing for retirement?
For many people it’s time to start looking at retirement differently. The reality of retirement has changed. The savings one has accumulated at retirement are no longer guaranteed to last through your retirement years due to higher costs of living, the effects of forces like inflation and longer lifespans.
Encouragingly, the engagements that the Nedgroup Investments institutional team has had with people approaching retirement have revealed that many people see retirement as an opportunity to reinvent oneself. While retirement from formal employment is likely, many people are open to other avenues of generating income thereafter.
Meanwhile, preserving one’s retirement capital remains crucial - so staying informed with regards your financial affairs, keeping in touch with your financial advisor and practicing responsible spending are all still paramount for people approaching or in retirement.
What if you need money now due to Covid-19?
Many people have been made redundant or have fallen on hard financial times as a result of the Covid-19 pandemic. No amount of planning could have prepared people for this kind of event so of course, it’s important to remain realistic in terms of financial needs.
Some people will need to access funds that they have saved for retirement in order to tide them over during this time. For people who are years away from retirement, this is less of a concern as they have time to make up the shortfall. Foe people close to or in retirement, this needs to be carefully considered.
The important thing to balance is your need for income now and your long-term need for income when you retire.
Do you use your retirement annuity to bridge a shortfall right now?
Before dipping into retirement savings, the best place to start is with your savings. The second option is to use your tax-free investment. However, remember that your tax-free savings currently have a lifetime limit – so if you withdraw from this you cannot replace it and you would be foregoing the long-term tax-free savings. The final option is to use your retirement annuity. However, if you use your retirement annuity you will have to commit to a minimum withdrawal amount.
There is also the option to defer retirement.
An analysis of the drawdown you plan to take in retirement will give you a real sense of how achievable this is for you. A survey of people approaching retirement who had made use of the Nedgroup Investments MyRetirement Solution, an innovative in-person and online support system designed to help people make better decisions about their retirement investments, revealed that generally, users overestimated what they thought they could drawdown in retirement by about 2-3 times.
Delaying retirement by just 3 years which can have a huge impact on your position in retirement. This is due to the power of compounding which is most effective in the final years before retirement (so you would be benefitting from that for longer) – and, because you will not be drawing down in those years, you will also have additional income. So the cumulative effect of delaying retirement becomes more like a 6-9 year benefit.
Another good tip is to use the years leading up to retirement to deleveraging your finances to reduce the burden on you in retirement.
How do you decide what is enough?
Figuring out how much money you need to save for your retirement is one of the biggest conundrums for many people. Start by being clear about your current financial position, informed about your investment options and structured about your long-term savings objectives. Using tools like the Nedgroup Investments My Retirement Solution can also be very helpful.
Some important things to remember when deciding how much is enough:
• You need to be able to grow your income relative to inflation. Inflation is the silent killer to retirement savings.
• Consider your medical costs. Medical costs generally increase above inflation and there will also be costs that are not covered by medical aid, so you need to have money set aside for this.
• Do a cash flow analysis with your financial planner and be clear about what your requirements are – and what your desires are.
• Ideally you should aim for a 60-70% replacement ratio of your salary – or 240x your monthly expenses in retirement.
What are the options in retirement
At retirement you have two options when it comes to investing your retirement savings:
- Life annuity:
A life annuity provides an income for life with set increases. However, these increases in income may not keep up with inflation. Life annuities also do not enable one to leave capital as inheritance.
- Living annuity:
A living annuity on the other hand allows one to choose how much income you would like to draw. It is market-linked and will fluctuate depending on the performance of its underlying investment portfolio and therefore does not guarantee that the income will last. With a living annuity, it is possible to leave money behind as inheritance.
In order to suit their needs, many people opt for a hybrid option in retirement. For example, you can buy a life annuity with a portion of your retirement savings and then switch to a living annuity for the remainder of your savings.
However, if you plan to take a life annuity, the research shows that it is not optimal to delay switching into this. The best time to do it is sooner rather than later. At the moment the law neither prohibits or allows the purchasing of multiple annuities so it is worth checking with your provider what they allow.
The impact of costs here is also an important consideration as costs erode your savings over time.
The best of both worlds: Nedgroup Investments Living Annuity Plus
Nedgroup Investments offers a Living Annuity Plus solution. Designed to address the most typical concerns and limitations of traditional annuities, Living Annuity Plus effectively gives retirees the best of both worlds by providing longevity protection while still allowing annuitants to select their income, and enabling provision for an inheritance.
My Retirement Solution has a dedicated and experienced retirement coach is at the heart of the MyRetirement Solutions offering, with experienced and successful retirees as well as accredited financial planners available to partner with people on their retirement journey, from when they need to start considering their at-retirement investment, right through their post-retirement years. Then, to help pre-retirees develop the best investment plans for their unique needs and expectations, this lifetime one-on-one retirement support is augmented by a world-class digital retirement modelling tool, which allows
MyRetirement Solution clients to do full needs analyses, test their existing retirement thinking, and develop a clear and comprehensive retirement action plan.