Millions of South African retirees are likely to run out of money before they run out of time. If you are approaching retirement, it is essential to determine the amount of money you will need to make ends meet. You will also need to estimate what your expenses will be once you stop working. If you do not grasp what your income and expenditure needs will be, you run the risk of depleting your capital during your retirement years.
The first step in the process is to determine your income level once you retire. A rule of thumb is that retirees usually survive on a post-retirement income of between 70% and 80% of their pre-retirement income. This is subject to several factors and should merely be used as a guide.
You then need to understand what your expenses are likely to be when you are no longer working. Certain expenses may reduce or fall away, while others might increase. You will need to budget for the usual monthly living expenses such as groceries, rates and taxes, security, communication and transport costs, and some potentially new expenses.
Hopefully, by the time you retire, your children will have been educated, and you will have managed to settle all major outstanding debts, such as home loans. At this stage of your life, you may not need to spend as much on life and disability insurance as you would have when your children were young and had a debt to service.
On the other hand, when you retire from formal employment, you will more than likely lose your employer-sponsored medical aid subsidy, which will inevitably result in your having to pay a higher medical aid premium. Medical expenditure often increases as one ages, so it would be prudent to factor in higher medical costs when determining your future expenditure requirements. Frail care, assisted living, and private nursing can be extremely expensive, and you should plan for such care in case it should be necessary.
You should anticipate and budget for the occasional large capital outlay such as overseas travel, costly medical appliances, the purchase of new motor vehicles and even for providing family members with financial support if you are in a position to do so.
Although it is essential to understand your retirement income and cash-flow needs as you approach retirement, the younger you are when you start to plan, the better. The longer you delay the financial planning process, the greater the percentage of your disposable income you may need to invest in securing your financial future.
Only around 6% of South Africans can maintain their standard of living when they reach retirement age. The rest will have to dramatically downscale their standard of living or may even have to rely on family or the State for support. An experienced Certified Financial Planner® will be able to assist you in determining whether or not you are on track and, if not, what changes you need to make to order to achieve your financial goals.
Rands and Sense is a monthly column written by Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth. His Financial Planning Office number is 046 622 2891