How to make sure you don’t outlive your savings
Did you know that you may be able to live another 30 years after your retirement? How do you make sure you live your golden years without worrying about finances?
Consolidated Wealth Consulting Partner Paula Walker (CA) SA says the earlier you start planning for retirement, the better.
“It’s a scary thought for any 22-year-old that his retirement can be almost as long as the number of years he will work. But whether you’re just starting out or nearing retirement, you’ve got to have a plan for what’s next, ”Walker said.
Walker outlines five steps everyone should take to build a solid retirement plan.
1. Understand your time horizon
Your current age and the expected retirement age form the basis of an effective retirement plan. The longer the period between now and your retirement, the greater the level of risk your portfolio can bear. If you are young, you should probably have the majority of your retirement assets in higher risk investments. The older you are, the more your portfolio should start to focus on income and capital preservation. Your financial advisor will tailor this plan for you and review it regularly to keep you on track.
2. The power of composition
Savings are like an acorn. It starts out small but over time it will turn into oak. You might think that saving a little more in your 20s won’t mean much, but the power of funding will make it considerably more valuable when you need it. If you change jobs, however tempting it may be, reinvest your company pension or pension benefits. Your financial advisor will act for you and integrate it into your overall retirement plan.
3. Combine your retirement planning with an investment strategy
You need to divide your investment planning into several parts. For example, let’s say you want to retire in Hermanus in 10 years but also need to fund your child’s college education. To provide both, you can combine your retirement plan with an investment strategy. This would be divided into three periods: 10 years until retirement (contributions are still paid to your plan); save and pay for college; and living in Hermanus (with regular withdrawals for living expenses). Your financial advisor will develop a phased retirement plan that integrates these time horizons with the corresponding liquidity needs.
4. Balance the longevity of your retirement portfolio
A key factor in the longevity of your retirement portfolio is your withdrawal rate, so it is essential that you have an accurate estimate of your retirement expenses. While most people need about 70 percent of their pre-retirement spending, this is unique to individuals and their circumstances. Undervalue your spending and you will likely outlive your wallet. Overstate your spending and you risk not living the lifestyle you want. Specific retirement goals are helpful, as more spending in the future requires additional savings today. A financial advisor will help you with this task, using modeling tools to develop a realistic and sustainable retirement plan.
5. Know what you have and what it gets you
Everyone needs to know what assets and liabilities they have, how these are likely to change, and how each contributes to your goals. If you’ve never taken stock of your post-retirement lifestyle, it’s time to meet with a financial advisor to build a roadmap to financial success. This will create realistic expectations about your post-retirement lifestyle and current saving behavior.
Walker says one of the most difficult aspects of creating a sustainable retirement plan is balancing realistic performance expectations with a desired standard of living.
“The best solution is to work with a financial advisor to develop a flexible, personalized plan that evolves with your changing life circumstances but remains focused on your retirement goals,” Walker concluded.