Most people approaching retirement do not know where and how to start planning for retirement. Planning for retirement probably requires the retiree to make some of the most intimidating decisions in life. What is worse, some of the decisions cannot be ‘rolled back’ again, and the pensioner will have to live with them for the rest of his life.

Here are a few practical guidelines for your retirement:

  1. Firstly, determine your household’s monthly cash flow surplus or shortfall based on your assets and liabilities and your cost of living before considering how to invest your available capital. It requires the following:
    • a) Prepare a detailed monthly budget of your typical cost of living and other ongoing monthly obligations and provide for any other exceptional or irregular costs such as known repairs and maintenance to your residence, your holiday house, motor vehicles, machinery and equipment, holidays and medical expenses that you may have to carry over and above what is covered by your medical aid.
    • b) Determine your expected income from any other investment or pension after providing for income tax.
    • c) The difference between 1a) and 1b) will reflect either a shortfall or a surplus before the prospective pension income you will earn from your retirement capital.
    • d) If the difference per 1c) is a surplus, you can be more flexible regarding investing your available capital. If the difference per 1c) is a shortfall, your focus should be investing your available capital to provide a stable monthly income covering as much of your regular expenses as possible. It may also require you to reconsider your budget per 1a) to reduce your cost of living.
  1. Secondly, having determined your cash flow position as per 1c), you now need to decide how to invest your available capital.
  • a) In case of a surplus per 1c), you can invest your discretionary capital (cash from your retirement fund and any other capital you may still have available for investment) more aggressively to achieve higher investment returns.
  • b) In case of a shortfall per 1c), you need to invest your discretionary capital (cash from your retirement fund and any other capital you may still have available for investment) more cautiously to secure a stable monthly income.
  • c) Ideally, you should have funds that are readily accessible (money market, savings, call deposit, etc.) to cover your expenses in 1a) for at least the next 6 to 12 months. Alternatively, if your mortgage bond would allow you to take up money again without a significant effort, in case of an emergency, your one-third portion from your retirement fund can be used to repay the outstanding balance on the mortgage bond.
  1. Paying back a mortgage bond with a one-third pay-out from a pension or retirement annuity fund (untaxed) is a sound investment decision, provided you can draw on that bond again in an emergency as per 2c).
  2. Having your total provident fund capital paid out (where you are a provident fund member) to be reinvested is usually not a sound investment decision. First, you will be taxed on two-thirds of the benefit. You need to invest the balance elsewhere after tax has been deducted. It will be challenging to achieve a return on such an investment when you consider the lost tax. You would typically incur initial and ongoing fees on such investment or would sacrifice investment returns. That would not be the case if you retained your capital in the retirement fund to receive a monthly pension.

The above exposition should indicate the required information before considering how to deal with your pension or provident fund retirement capital.

Where you are allowed to switch to another investment portfolio in anticipation of your retirement, mainly for the sake of protecting your retirement capital, your decision should be based on the following considerations:

  1. Investing in a volatile market portfolio can produce negative returns depending on the investment environment and short-term investor sentiment.
  2. Are there any prevailing political or economic uncertainties that pose a risk of investment markets declining over the next year or two and requiring you to protect that part of your retirement capital that you intend to withdraw in cash?
  3. Suppose you are planning to retire within the next 36 months. In that case, your investment horizon regarding your retirement capital is short-term, at least until you have concluded the above process, and you should avoid the risk of negative returns of any retirement capital you intend to withdraw by switching to a lower-risk portfolio.
  4. You do not need to be concerned about any portion of your retirement capital you intend to convert to a monthly annuity or pension. It will cost you less to buy the annuity for less should the market have turned negative just before your retirement, or vice-versa.
  5. If you can choose to switch to a guaranteed (or smooth bonus or absolute growth) portfolio, you will not run the risk of negative investment returns until you retire.

Important notice and disclaimer
This article summarises the understanding, observation and notes of the author and lays no claim on accuracy, correctness or completeness. RFS (Pty) Ltd does not accept any liability for the content of this contribution and no decision should be taken on the basis of the information contained herein before having confirmed the detail with the relevant party. Any views expressed herein are those of the author and not necessarily those of RFS.







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