10 tips to retire in Paradise - Part 2

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5 Planning (failing to plan = planning to fail)

If you are a member of Generation Y (born after 1980), you are young, single and carefree. You think about your university loan repayment, your cellphone bill or your credit card balance, food, healthcare and the latest fashions. However, you are actually in the best position of your life to start saving for retirement. Compound interest (often called the seventh wonder of the world) will actually work in your favour. If you are 20 and set aside 15% of every rand you earn during your working career, you will be in good financial shape at retirement age. If you are a member of Generation X (born between 1965 and 1979) and wait until you’re 40 to start saving for retirement, you need to save 25% of your earnings. A baby boomer (born before 1965) who postpones until 50 will need to jump in and save 45% of earnings to survive in retirement. There is no magic number referring to the amount you need to save, but be sure to start retirement planning from the day you start your working career and accumulate a nest egg to ensure your money is sufficient to carry you through your golden years.

Basic planning steps:

a. When: You need to decide about the age at which you want to retire.
b. How much: Estimate the annual income you will need during retirement to maintain your standard of living. It is usually about 60–80% of the salary you earn before retirement.
c. Market values: Get your annual retirement fund statement from your employer. It provides the market values of your retirement savings.
d. Additional savings: Get the market value of any additional (retirement) investments that will provide funds in retirement.
e. Return on investments: Determine what a realistic real rate of return on your investments will be, based on the underlying asset classes in which you have invested, e.g. equities, bonds, cash. Deduct expected inflation from your returns to determine your real return. Estimates of realistic expected real returns are in the range of 3–5%.

Conclusion:

Total needed at retirement: Determine in today’s money how much you need to have at retirement to satisfy your retirement needs.
Annual savings required: Calculate how much you need to save per year to accumulate enough money.

Do not worry about the calculation yourself. Get hold of a trustworthy financial planner to assist you with your retirement plans. Most companies have sophisticated retirement planning packages to assist members.

GENERATION Y (age 20-30 years)

• Start planning today
• Preserve your fund when you resign
• Keep a budget
• Manage your debt
• Boost your retirement savings
• Appoint a financial adviser

GENERATION X (age 31-45 years)

• Follow exactly the same steps as generation Y members PLUS
• Review your strategy with your financial adviser
• Consider the impact of any changes in your personal circumstances (e. g. marriage, children, divorce, death, job change)

BABY BOOMERS(age 46-60 years)

• Think about the impact of early retirement
• Consider your sources of income during retirement
• Consider a job in post retirement
• Plan for your healthcare options
• Plan your post retirement lifestyle e.g. where to live, travelling
• Meet your financial adviser regularly.

In addition, remember, if you don’t have a goal, there’s nothing to aim for.

6 Professional financial advice (Knowledge is power!)

When it comes to making important investment decisions, it is always best to get professional advice from people who have the required skills and training.

A good accredited financial adviser will sell financial products that are appropriate to meet your financial needs. Investors will be protected by the Financial Advisory and Intermediary Services Act (FAIS) to prevent miss-selling.

Good financial advice

Find an adviser who discloses his or her identity, the company, method of financial planning, the services that he/she can provide, as well as the remuneration system
Gather your personal details and data and set out the responsibilities of both parties
Set realistic goals after an analysis and evaluation of your financial position, taking into account all your active insurance policies
Develop and present financial planning recommendation or alterations
Implement the recommendations and monitor them regularly
Get a second opinion
Be informed – check benefit statements, investment performance, default options, vote for trustees, take responsibility.

7 Paperwork

Save yourself lots of trouble later by having all your policies, your will and personal documentation updated. Keep the following information updated and inform your insurance company of any changes:

• Spouse and child details (especially in the case of death and divorce)
• Banking details
• Address and telephone numbers

In addition, know what benefits are covered in your policies by your retirement fund. During regular appointments with your financial adviser, inform your financial adviser and review your policies for a change in personal circumstances. It is also very important for all spouses to be informed about retirement matters.

8 Pre-retirement savings

The secret of having enough money is not necessarily putting away huge amounts of money during your working life, but rather to start saving for your retirement early enough.

Compound interest is normally referred to as the seventh wonder of the world.
The earlier you start saving, the more you will reap the benefits of the effect of compounding. The real benefit of compound interest is that your earnings will be invested as soon as you receive them, which means you will earn interest on your earnings.

Grab opportunities given by employers to increase retirement savings and
other benefits (trauma, death cover, etc).

9 Part-time job

Studies indicate that many people prefer to work at least part-time in retirement. In some instances, it is due to financial necessity, but it also gives them a sense of purpose in life.
Post-retirement income is an important method to prevent withdrawals from your nest egg and provide income during retirement. Let’s look at an example:

Bob and Tim are in exactly the same financial situation at age 55. Each receive a monthly income of R20 000 and an accumulated fund of R1 240 000.

Bob decides to retire early at age 55. Tim works until age 63 and continues to contribute 6% of his monthly salary (and his employer contributes 7%). Tim receives an annual increase of 4% per annum and interest of 1% per month.

The situation after 8 years:

Tim was able to accumulate almost R2 450 000 more than Bob. By retiring early, Bob not only lost out on his and the employer’s contributions together with investment returns, but will also withdraw from his accumulated fund.

10 Post-retirement medical aid expenses

Old age typically brings medical problems and increases health care and medical expenses. The employer contribution falls away at retirement and the payment of medical aid then becomes the pensioner’s responsibility.

Without planning and saving for your medical aid expenses, living out your golden years in comfort while also covering your medical expenses, may result in a burden too big to carry on your own. Prevent your deteriorating health from wiping out your nest egg by saving for your medical aid expenses and allowing increases in your contributions of 10–15% per annum. Also, consider taking out health care insurance.

Karen de Kock-Wentzel | Head of Annuities at Sanlam Structured Solutions