10 things to consider to ensure a carefree retirement

By Karen de Kock-Wentzel, head of annuities at Sanlam Employee Benefits

Retirement is often referred to as the “golden years”. These days, the golden years have become longer – statistics show that on average, men aged 60 will live for another 18 years while women aged 60 are likely to live another 21 years. The harsh reality is, however, that many people will not have saved enough money to carry them through these years, and many will have to go back to work or rely on family to survive.

Karen shares 10 considerations you could bring to your clients’ attention to ensure a retirement without financial challenges:

1. Personal responsibility: With the shift away from defined benefit plans to defined contribution schemes, the onus is now on individuals to select their own pensions in the form of annuities. This means employees need to plan in advance to ensure financial comfort in their golden years.

2. Past and present: People no longer spend their entire careers with one employer, which would have enabled them to achieve an income level of 75% of their last salary. People now start working later, retire earlier and live longer. They also tend to change jobs often and do not always preserve their retirement savings. The result is that people are not saving enough – statistics shows that only 6% of South Africans can afford to retire.

3. Pension types available at retirement: Upon retirement, employees face one of the most important financial decisions of their lives: choosing the type of pension that best suits their needs. Various options are available:

• Guaranteed escalation annuity: These provide a pension that increases at a fixed rate for the rest of the pensioner’s life.
• Level annuity: This is a guaranteed escalation annuity with a 0% increase, and makes no provision for annual increases. It will provide the highest initial pension, but pension payments will not keep up with increased cost of living.
• Inflation-linked annuity: This annuity provides a guaranteed monthly pension with annual increases equal to inflation.
• With-profit annuity: The annuity provides a guaranteed income for life with some investment participation in the form of increases via annual bonus declarations. The bonuses are derived from the return in the underlying portfolio.
• Living annuity (ILLA): In exchange for investing a cash lump sum, the investor receives a monthly pension for as long as there is money available in the fund. An ILLA provides pensioners with a greater degree of freedom in managing their investments, but it also places the burden of responsibility for making the right choices on the client.

Each of these annuity options has advantages and disadvantages. The three most important decisions clients should make when choosing an annuity are:

• What level of initial pension is required?
• What type of future annual increases is preferred?
• What types of risks is the client prepared to take?

4. Preserving retirement savings: People in their 20s have a reputation for job hopping. Many cash in their retirement savings, but doing so two or three times over an employee’s career will erode a large amount of savings. It is crucial that benefits are transferred to the new employer’s retirement fund or to a preservation fund when changing jobs.

5. Proper planning: There is no magic number referring to the amount a pensioner needs to save, but retirement planning should start on the first day of the working career. The basic steps are to:

• Determine in today’s money terms how much will be needed at retirement to satisfy individual needs
• Calculate how much the client will need to save to accumulate enough money.

6. Professional financial advice: When it comes to making investment decisions, it is always best to get professional advice from people who have the required skills and training. A good, accredited financial adviser will sell products that are appropriate to meet individual financial needs.

7. Paperwork: Clients should always keep policies, wills and personal documentation, spouse and child details, banking details, and addresses and telephone numbers updated and inform their insurance companies of any changes. It is also important for spouses to be informed about retirement matters.

8. Pre-retirement savings: The secret of having enough money is not necessarily putting away huge amounts of money, but in starting retirement savings early in life. The value of compound interest cannot be emphasised enough.

9. Part-time job: Studies show that many people prefer to work at least part time in retirement. Post-retirement income is an important way of preventing withdrawals and providing income during retirement.

10. Post-retirement medical aid expenses: Advancing age typically brings with it increased medical expenses. Clients should be encouraged to save for medical expenses by allowing for increases in their contributions of 10-15% per annum.