Choose your retirement conditions

2010-09-04 13:15

Poor financial planning, combined with the fact that employers are stingy or cry poverty when it comes to providing financial literacy programmes for ­employees has led to many employees going on retirement financially ill-prepared to face the challenges of a reduced income.

Statistics show that income drops by as much as 60% when an individual retires. This means for every rand earned during employment, the retiree may end up receiving only 40c in retirement.

Many workers buy property late in their working lives and, as a result, when retirement age arrives, many have to settle their bonds and other debts from their retirement benefit. ­Depending on those debts, the retirement capital could shrink so badly that it provides ­income that is even below 40%.

I have realised that many retirees from provident funds elect to receive their full benefit where fund rules do not stipulate that two thirds of the benefit should purchase an annuity.

People who do this often end up in a business venture such as taxi driving to boost their post­retirement income. Most of them fail because running a business is never easy.

The absence of a culture of saving and the fact that people have only employer retirement funds as retirement savings, are the main reasons that post-retirement income drops so much.

Even the products, such as living annuities which allow a retiree to choose market-linked portfolios, come with the risk associated with markets.

The lesson here is that a personal financial position, health, family circumstances and resourcefulness dictate the ideal retirement savings plan.

An individual’s failure to adequately plan their retirement often leads to many years of old-age destitution and dependency on charity.

There is new legislation that forces advisers and insurance companies to fully disclose various ­scenarios and how levels of drawdown (the drastic plummeting of an investment during a specific period) impact on capital invested and how this could affect an annuitant over time.

This means annuitants from compulsory sources such as pension and retirement funds may not get the leeway of electing drawdowns that could ­possibly exhaust their capital. The law will ensure that correct products are sold and also force advisers to continually consult and advise their clients.

  • Diale is a financial planner. He can be contacted on 078 775 0802

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