When you find yourself in an uncomfortable or strange situation, they often say that you feel “like a fish out of water”.
For an average of 40 to 45 years, you “swim with the school”, whether it is as part of a particular company, or a group of friends or your family.
You will earn an annual income, usually in the form of a salary, commission or a bonus, and you will build a nest egg over time, only to hear someone say to you one day, “Thank you for your wonderful service. Go and enjoy your well-deserved retirement.”
Suddenly you find yourself on your own, and small problems that could easily be overcome when you were earning a monthly salary can become huge problems after retirement.
It is by limiting and/or eliminating these small issues early on that you can ensure a comfortable retirement where you are able to outlive your capital and not the other way around.
The most common mistakes made by retirees are the following:
1. I never needed to use a map, why now?
As the saying goes: “If you fail to plan, you plan to fail.” For years you may have been part of a structured company.
It may have had a CEO who looked after the company’s reputation and philosophy, a financial director who was responsible for company finances, human resources managers, operational managers, etc.
These people had to plan as individuals in order to function and grow as a group. Upon retirement, you find yourself alone and having to control every aspect of your life.
What many retirees often overlook is a good plan for retirement. Just as you have to plan for retirement before it happens, you have to plan for it after the fact, not only financially, but in every way possible.
Retirement doesn’t have to mean that your world will come to a standstill, as long as you ensure that you live within the means of your monthly pension allowance, and as long as that allowance includes a savings portion for unforeseen expenses.
2. Maybe all I needed was a long vacation…
Let’s be honest – with current medical advancements, 60 is no longer old, and although there may be a few individuals who have to retire at that age due to medical reasons, most people that age are healthy enough to keep working for another five to 15 years.
Don’t rush into retirement. For every year you manage to postpone your retirement, it is one fewer year that you have to dig into your savings.
Let’s suggest, however, that you are retired and now feel like you have made a mistake. What can you do? In this case, the cause will determine what the solution may be.
If you came to the realisation that you won’t be able to survive on your retirement savings for the rest of your life, you could consider working part-time or turning a hobby into a business venture.
If none of these options will work for you, you may have to consider scaling down by moving into a cheaper or smaller residence, or to try earning a rental income if you have a spare room or some other space that you can rent out.
3. I’m sure there’s more than enough
This is where so many investors fall. Most financial planning structures are aimed at providing enough capital to provide for between 75% and 80% of your final year’s income.
But now that you’re retired, you suddenly find that new-car smell just too difficult to resist, or you love the local restaurants so much that you find yourself supporting them more than you should.
Before you know it, you’re spending more than you did before you retired, and by the time you finally wake up, your pension fund may very well be depleted.
A budget is as important, if not more so, after retirement as it is before, so make sure that you have one, stick to it, and be aware of the temptation to spend more than you can afford.
4. Who’s afraid?
Risk tolerance is divided into two main components. Firstly, your appetite for risk, and secondly – and more importantly – your capacity to take on risk. Your appetite can easily be determined by completing a well-compiled risk-profile questionnaire.
The reality is, however, that even if you were fine with taking more investment risk when you completed the questionnaire three to five years ago, your circumstances post-retirement will most probably indicate that your capacity to take risk may no longer fall in line with your appetite to do so.
Always make sure that your true risk tolerance reflects in your retirement investments.
5. Maybe I’m too afraid…
Further to point 4, many retirees make the mistake of thinking that now that they are retired, all of their investments should be moved down from a moderate to a very conservative profile.
I often hear people say that in order to determine your exposure to growth assets such as shares, you have to subtract your age from 100 and use the balance in percentage as your exposure percentage to growth assets.
Please don’t ever use this as a guideline to building your retirement portfolio, as what may work for others may not necessarily work for you.
The truth is that something like the annual growth in medical expenses can often only be countered by the growth earned on shares, so be sure you are not invested too conservatively.
6. Thrown to the wolves
I will have to tread carefully here, as I know this is a very sensitive subject. So many retirees have been persuaded by a comforting smile or the promise of good returns, only to become part of the statistic of people who lost all of their hard-earned retirement savings to a fraudster.
Please do your homework properly, and make sure that the adviser or company that you appoint to manage your capital has a good and long-standing service record.
7. Is the emperor getting more than his fair share?
With tax brackets that have increased dramatically over the last five years, many investors still make the mistake of not considering all the available investment structures to invest their retirement savings.
As a result, many retirees pay much more in taxes than they need to. Make sure that you have considered all the available retirement investment options and that the one you are currently using is still the optimal choice.
8. Blood is thicker than water
This is yet another very difficult subject, and it’s such a sensitive issue that I almost didn’t include it in my list. But the fact is that it takes much longer for our children to find jobs these days, and with the economy struggling as it is, they find it even harder to keep them.
To hear that your child is struggling financially has to be one of the toughest things to process, but remember that supporting your adult child was never part of your personal retirement plan.
Of course, there are always exceptions, but if yours is not such an exceptional case, it may become necessary to use the word “no” more often, no matter how difficult it may be, especially when it comes to the preservation of your retirement savings.
9. Your house doesn’t have to be a castle
If you own a house, you will know that it isn’t just a roof over your head; it’s your pride and joy. The problem is that upon retirement many retirees convince themselves that now is a great time for those renovations they couldn’t afford when they earned a monthly salary.
In the process many overcapitalise on these renovations, which causes a massive dent in retirement savings over the long term.
Determine what your exact needs are, and live within your means, even if you have to braai outside.
10. Back then, my pension was worth a lot more
When we take a look at inflation over the last 20 years (an average of 5.86% a year), we will see that the person who had R100 000 back then had to take good care of it for that amount to have the same purchasing power today. R100 000 20 years ago would cost you more than R310 000 today if you had to buy it.
Put differently, if we assume that inflation figures will repeat themselves over the next 20 years, then the person who hides R100 000 under their mattress for the next 20 years will only be able to purchase R30 000 worth of goods or pay for that amount in services 20 years from now, in today’s terms. Ensure that you have set a proper inflation target.
I believe that as investors we shouldn’t only focus on the problems but rather on the solutions. Be sure to enter this new and exciting phase of your life with a proper retirement plan that gets revised on a regular basis to determine if you are reaching your goals.
Prevention is always better than cure, but if you happen to find yourself facing one or more of the problems listed above, the best cure will be to act as soon as possible.
Find the right financial adviser or financial services provider, and tackle these issues together. Remember, no one cares more about your pension or capital than you do.
Schalk Louw is a portfolio manager at PSG Wealth.
This article originally is part of a longer cover story on retirement that appeared in the 16 November edition of finweek. Buy and download the magazine here.