In the popular 90s ‘Choose Your Own Adventure’ books, readers had a selection of scenarios to choose from, each with its own ending – all in one book. Retirement can work similarly…
There are a series of choices that will affect how your golden years story plays out.
Did you choose to save early on? Did you spend your accessible savings or invest them? Or choose to withdraw more than the recommended amount? The choices you make will have a big impact on how your retirement adventure unfolds.
Glacier by Sanlam recently conducted in-depth, face-to-face interviews with 82 South Africans who had retired successfully. The ‘Through the Years’ research looked at what choices these retirees had made when they were ‘Choosing their Own Retirement Adventure’.
Based on this and other research, here are some of the most common scenarios to choose from when planning your retirement adventure.
CHAPTER 1: WHEN WILL YOU START SAVING FOR RETIREMENT?
Scenario 1: You choose to save early on:
You know that 25 (or earlier, if possible) is the optimal age to start saving for retirement because it enables you to capitalise on compound interest. You find a financial adviser who has a holistic understanding of your financial short- and long-term goals, and you aim to contribute at least 15% of your annual salary to reach your retirement savings goal.
As your salary increases, you’re able to contribute more, and you put a portion of your annual bonus towards the cause as well.
Your financial adviser invests your funds in high growth assets and, in combination with compound interest, your savings grow considerably over the 40 year period. As your salary increases, you’re able to contribute more, and you put a portion of your annual bonus towards the cause as well.
To use an example to illustrate the benefits of starting to save early: If you saved R100p/m for 40 years (starting at age 25), you’d retire with the same sum as someone who had to save R850p/m (i.e. 8.5 times more) for 20 years (due to only starting at age 45).*
Scenario 2: You leave saving for later:
You haven’t saved enough and you’re close to retirement, you’re going to need a smart strategy quickly to keep living the lifestyle you’re accustomed to. This may involve a thorough examination of your current budget and spending habits in order to find more funds for your retirement savings.
You’ll also need a carefully thought-out income withdrawal (draw down) strategy post-retirement to ensure your withdrawal activity doesn’t exceed the returns you earn on your investments. Remember, you can also take on a ‘gentler’ secondary career, with part-time work to supplement your pension after retiring. You can catch up, but it takes effort and expert guidance.
CHAPTER 2: HOW WILL YOU USE YOUR LUMP SUM ON RESIGNATION BEFORE RETIREMENT, AND AT THE POINT OF RETIREMENT?
Scenario 1: You invest your lump sum:
When you leave an employer, you choose to preserve your retirement funds, allowing these to grow until you retire so as to avoid depleting your total accumulated savings.
Later, when you retire, you choose to work with a financial adviser to decide how much, if any, of your retirement capital to withdraw. You invest this portion wisely, and purchase a suitable annuity product with the balance.
Your financial adviser determines how much of your lump sum you should draw based on:
- Tax considerations
- Your liquidity scenario over the next 20-30 years (what you need money for)
- Property or other assets you’re considering investing in
Scenario 2: You ‘blow’ your lump sum:
Patrick Sheehy, head of product management at Glacier by Sanlam says that many people are overwhelmed by the size of their lump sum pay-out and so are frequently lulled into believing they can spend it – or at least a significant portion of it – while still having enough capital for a reasonable income for the rest of their lives.
If you spent your lump sum instead of reinvesting it, it’s advisable you consult a financial adviser as soon as possible to fully understand the best options available to grow your remaining capital. As with chapter one, you’re going to be playing catch-up, so you’ll need to adjust your investment and withdrawal strategy accordingly.
CHAPTER 3: WHAT DOES YOUR INCOME WITHDRAWAL STRATEGY LOOK LIKE?
Scenario 1: You stick closely to the recommended income withdrawal amount
Your savings seem flush so you’re tempted to withdraw more, but you know you need a responsible withdrawal strategy to sustain your retirement income for the rest of your life.
You work with a financial adviser to ensure you have a sustainable and growing income that gives you sufficient funds to cover your monthly needs.
You understand the difference between essential (e.g. rates and taxes, food and healthcare) vs. non-essential (e.g. hobbies, travel and ‘nice-to-haves’) needs in retirement and plan and spend accordingly.
In conjunction with your financial adviser you:
- Create and regularly review your withdrawal strategy
- Review and manage your investment strategy
- Examine your essential vs. non-essential expenses
- Come up with a strategy if your needs change
Scenario 2: You draw too much and it eats into your capital:
Sheehy says he’s seen many clients with a drawdown rate of between 8-15% (the maximum allowable withdrawal is 17.5%), which eats into their capital early in retirement.
If you’re withdrawing too much, you may not be able to sustain an inflation-linked income and may need to adjust your lifestyle in the future.
If you’re withdrawing too much, you may not be able to sustain an inflation-linked income and may need to adjust your lifestyle in the future. You may have to sacrifice some luxuries to supplement non-essential costs, but even your essential spending may come under pressure if you’re not managing your withdrawals responsibly. To try and maximise growth on retirement capital, some advisers may put clients with aggressive drawdown needs (for example 15%, which is three times the prudent suggestion) in high growth assets, but this can mean increased exposure to market volatility.
It depends very much on the client’s risk appetite and whether stability is, in fact, the better option. You need to be disciplined in the way you spend, working with a financial adviser to ensure you are allocating the right amount of funds to all areas so as to live a full life in retirement.
Your retirement is what you make it. Choose the right chapters and you’ll have the adventure of a lifetime. For more information, visit Glacier by Sanlam.
* This assumes a 10% return per annum.