Important questions to ask before you decide to retire.
Deep breath in. Deep breath out.
It’s time to assess whether or not you are financially ready to hang up your work boots. And if you are a young retirement saver – well done for beginning with the end in mind. This piece will give you a sense of why it helps to start sooner rather than later and answer that all important question: when can I retire?
Putting all the facts on the table may be a painful exercise, but the sooner you do this, the more options there will be to work with.
If age and health are not dictating the terms of your retirement, it’s worthwhile asking yourself the questions below to make sure you don’t exit the workforce too soon. In many cases it is difficult to get back on the bus once you get off.
- Is longevity in your genes?
Are your grandparents still alive? And how old were their parents when they died? Research indicates that longevity is in the genes: if you are destined to live for longer you need to save more to account for the extra years you will need to sustain yourself.
Longevity is one of the major financial risks facing pensioners. According to the South African Annuitant Standard Mortality Tables, around half of pensioners live for 20 years beyond age 65, around 20% live for more than 30 years, and 10% live beyond 100. You could have a good number of years ahead of you and you need to plan accordingly. Remember that average life expectancy numbers are exactly that: averages. Consider your best and worst case scenarios before you retire.
- Do you have enough money squirreled away?
The rule of thumb for retiring financially independent is that you will need a capital sum of about 17 times your final annual pre-tax income. This will give you an income in retirement equal to about 75% of your pre-retirement income at a retirement age of 65 (if you plan to draw 4% from a living annuity and increase your income each year with inflation).
Remember that if you received an above-inflation salary increase later on in life, your saving during your earlier years may not adequately contribute to your retirement savings pot. Do your calculations carefully to make sure you can afford the lifestyle you expect.
- Have you accounted for the rising cost of living?
Inflation doesn’t discriminate, affecting most goods and services over time, eating away at the buying power of your savings. This is why wealth should always be measured in terms of buying power, as opposed to the number of rands. Inflation erodes your buying power over time.
When you assess your income needs at retirement it is important to factor in that medical inflation and education inflation are higher than the average inflation rate. Estimates of how much you may need to sustain yourself in retirement often do not account for funding education.
Consider retiring later if the questions above concern you
Be realistic about how much you have saved and your potential lifespan. This will help with developing a plan that accounts for the key risks retirees face: the risk of outliving your money, and the risk of inflation eroding your buying power over time.
If you are at all worried, it is worthwhile postponing retirement and continuing to save during the years you carry on working. As discussed in Part 8, this has a doubly positive impact in that you have more years to save, and fewer years to live off your savings.
Next steps if you are ready to retire
Many retirees make the mistake of thinking that retirement is the end of their investment cycle; actually it is the beginning of the next 30 or so years of investment. Your money needs to work as hard for you as you have worked to earn it, so guard against investing your post retirement money too conservatively. Inflation is your greatest enemy over the long term. Given these realities, think carefully before you make any decisions.
The final instalment of our series will talk you through the difficult decisions you will need to make at and during retirement.
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