A] Prelude*
* For more general information on pensions, investments and risk, feel free to visit our dedicated webpages:
• https://expatpensionholland.nl/global-pillars-systems
• https://expatpensionholland.nl/global-investments-risks-0
• https://expatpensionholland.nl/estate-planning-consultancy
As you approach retirement, the third phase of your life after childhood and your working years, planning for financial security becomes crucial, especially to protect the wealth you have acquired and maintain your lifestyle for the rest of your life.
Strategic financial management in retirement is relevant, especially considering that this phase can be divided into three distinct periods, each requiring different financial approaches.
A recent poll published on LinkedIn reveals that 68% of the participants saw sustainable income streams as a priority, ahead of preserving wealth at 19%, leaving a legacy at 10% and philanthropic endeavors at 3%.
The same poll on X revealed similar results with 66.5% of participants prioritizing a sustainable income stream, while 11% prioritized preserving wealth, 16.8% leaving a legacy and 5.8% selecting philanthropic endeavors.
B] Three phases of retirement
Retirement can be segmented into three logical phases:
• the active phase;
• the passive phase;
• the supported phase.
Each phase with its own unique financial needs, tax situation and challenges.
Active phase: In the early years of retirement, many people remain active, engaging in travel, hobbies and other leisure activities. This period is characterized by higher discretionary spending as retirees fulfil their bucket list dreams.
Passive phase: As retirees enter their seventies to eighties, their lifestyles often become more subdued. Travel and large-scale activities may decrease, your lifestyle may become more frugal and you may consider to ‘right-size’ your living arrangements.
Supported phase: The final phase involves increased health care and support needs. Expenses shift significantly towards medical care and assisted living.
C] Key risks in retirement
There are four key risks and making plans to mitigate them to maintain a good, steady standard of living is a good idea for people who are newly retired or approaching retirement.
Longevity risk: With people living longer, there is a real danger of you outliving your savings. Planning for at least 30 years post-retirement is essential. That means if you retire at 65, plan to live until you are 95.
Inflation risk: This is the risk that is most often forgotten. Inflation erodes purchasing power over time. What costs R100 today might cost significantly more in the future, affecting your standard of living. Therefore, it is wise to get professional advice on how to ride out inflation safely in the future through sensible and suitable investments that have a track record of delivering inflation beating growth.
Medical risk: Healthcare costs typically increase faster than general inflation, demanding a larger portion of your budget as you age. It is important to set aside funds for future medical needs, including enough to cover rising medical aid costs as you get older.
Tax risk: Make sure that your planning provides all the flexibility you need without exposing yourself to not needed higher taxation or higher tax rates. We too often see that using formal pension claims before the standard retirement age increases the risk of higher tax rates. Of course this depends on the applicable tax system in the country you are living in and/or the taxation at source from another country regarding international pay-out.
D] Strategic plan for retirement
Following are tips how to navigate these phases and risks, as strategic planning is relevant:
Choose a balanced investment approach: Your investment strategy should evolve with your age. In the early years and matching your personal risk profile, a higher proportion of your investment strategy could consist of growth-oriented investments.
As you age, shifting a portion of your investments to shorter duration and more conservative asset classes could help to protect your assets from market volatility. However, do not be too risk averse with your investment strategy, otherwise your capital may not keep growing at the rate required to sustain your needs. Needless to say, this still has to fit your personal risk profile
To manage inflation and ensure long-term sustainability, maintain a portion of your portfolio in growth assets, like equities. These investments help counteract the effects of inflation but should be balanced with stable assets like bonds and cash to manage volatility. The latter while also making sure you use all possibly existing wealth tax exemptions.
Budget for each phase: Map out your expected expenses for each phase of retirement. Consider your current lifestyle and how it might change. For instance, budget for travel and leisure in the active phase and allocate more for medical expenses in the supported phase.
Do this simple savings calculation: If you plan to retire at 65 and want to maintain the lifestyle you have become accustomed to when you had an income of R100000 per month, you might need 200 to 250 times that amount in savings, totaling around R20 to R25 million to sustain your needs until the age of 95.
Minimize your debt: Enter retirement with as little to no debt as possible. It is advisable to have all your major expenses paid off by the time you retire. Of course a mortgage can be solved in the planning as when you sell your home in order to use that capital, the mortgage will also end.
Implement a withdrawal strategy: A relevant aspect of retirement planning is determining a sustainable withdrawal rate from your savings. The ideal general drawdown rate is about 4.5 to 5% annually, retirement and age dependent. This rate should be adjusted based on inflation and your specific, changing financial needs and tax position.
E] Request Professional Assistance
When planning for your long-term financial stability, there is real value in consulting with professional financial advisors, who can personalize strategies based on your unique (tax) circumstances, accurately calculate the quantum you need to live the life you prefer and ensure your retirement plan is robust, risk-managed and adaptable.
Advisors can also help you consider additional goals, such as funding your grandchildren’s education/estate planning or fulfilling your philanthropic dreams.
Lastly, beware of schemes that promise unrealistic returns. Too often retirees fall victim to scams and ‘product sellers’, resulting in significant financial losses. A disciplined, well-thought-out plan is more reliable than seeking ‘quick fixes’. Any investment scheme that seems too good to be true most likely is.
F] Conclusion
Planning for financial security in retirement involves discipline, understanding the different phases, managing key risks and keeping the overall strategy simple and understandable, all of which can help you create a plan that can help ensure a comfortable, secure and fulfilling retirement.