How to retire comfortably
Make the right choices today
11 July 2020 | Opinion
When you reach 60, the last thing you want to worry about is your retirement.
However, to ensure a secure and carefree retirement, you must build a financial cushion that will fund your expenses and lifestyle.
Benjamin Franklin once said: “By failing to prepare, you are preparing to fail”. This has proven true in many spheres of life and one such area is retirement preparedness.
Retirement planning is a multifaceted process which starts with setting retirement goals. The plan helps you achieve the objective you have set for yourself and it will determine your quality of life after you venture into retirement.
Although pensioners in defined benefit funds such as the Government Institutions Pension Fund (GIPF) enjoy the security of having guaranteed benefits, possible increases in medical and other living expenses may reduce their purchasing power.
Just as events like Covid-19 can show the remarkable benefits of saving for your retirement, it can also highlight the exact opposite. As terrorising as this pandemic has been, retirees who made adequate retirement plans will enjoy a certain degree of comfort because they are adequately cushioned by their retirement savings during hard times.
Below are some tips everyone should take regardless of their age to prepare for and build a solid retirement plan that will ensure you have a comfortable retirement.
• Start early. The earlier you start saving, the higher the level of risk your portfolio can withstand and the longer your savings period will be. The success of your retirement programme is directly determined by the goal of how you would like to maintain or improve your lifestyle during your retirement years. If you wish to travel and make more purchases in retirement, you must save more.
Starting early is not necessarily just about retirement saving. It also includes paying off your debts. Ideally you want to pay off of your mortgage, vehicle loans and any other significant debts before going into retirement. This will help you avoid using your hard-earned retirement income to pay off debt.
A common misconception by people is to look at retirement as a far-off future event, thinking they still have plenty of time to save. However, this has proven to be the exact opposite.
Consider the following: As a young professional, who has just entered the workforce you probably think you still have a long way to go and plenty of time to save. But keep in mind that a 58-year old who is two years to retirement once felt the same, however s/he may now find him/herself in a situation where they have not saved enough.
• Avoid withdrawals before retirement: Often you may have to change jobs and one of the immediate temptations is withdrawing your retirement savings. Avoid this temptation at all costs.
Consider the following: The cost of living increases every year, especially health care expenses. You will want to live longer and thrive in retirement. Retirees need more income because, they are no longer at work for eight or more hours a day. As a result, we have more time for travelling, shopping, sightseeing, and engaging in other expensive activities.
The longevity of your retirement portfolio is greatly affected by your withdrawal and saving rate because it will ultimately affect how much you are able to withdraw each year. As a member of the GIPF, you have guaranteed benefits for life after retirement.
However, if you have invested in a retirement annuity plan that is directly dependent on how much you have saved, you may easily outlive your retirement savings. To put this in perspective, if you wish to withdraw N$10 000 each month from your retirement annuity, given you have not saved enough and interest rates are low, your retirement savings may not be able to sustain you for life.
This means, if you live longer than anticipated, you may end up with little or no income at all, as you may have depleted your retirement savings.
Thus, when you change jobs, transfer your benefit to your new employer’s retirement/pension fund. Alternatively transfer to a preservation fund such as Kuleni Preservation Fund or take out a retirement annuity plan instead of spending it.
All things being equal, to maintain a similar lifestyle during retirement as you had before, you need an income replacement ratio of at least 75% of what you were earning before retirement. For example, if you earned N$10 000 right before retirement, you need to “earn” at least N$7 500 after retirement. Making withdrawals before retirement will greatly hamper your ability to reach that goal, consequently decreasing your earning during retirement.
• Take out additional retirement savings: Covid-19 has shown us that the future is uncertain. Those who thought that they had sound retirement plans have since experienced a different reality, as they may have received little to no increases in their income or have had to take income cuts.
Should you be one of those who have made early withdrawals, not all hope is lost. This simply means you will have to save more for retirement than you currently are. Therefore, in addition to what you are currently saving in your current retirement fund, it is advisable to take out a retirement annuity plan to supplement your income during retirement.
This also goes for those who have not made any withdrawals but wish to meet their retirement goals and retire comfortably. For example, if you and your employer currently contribute 23% towards your retirement savings, you should also consider taking out a retirement annuity plan that will provide you with extra income at retirement. Your monthly premium will depend on your individual needs. Speak to a professional financial planner to assist you in this regard.
Retirement is your right to a period of leisure and a moment of rest with the confidence that your retirement scheme will take good care of you. Make the right choices today.
*Ignatius Manyando is the GIPF’s Manager: Annuities.