22 February 2021 | Opinion
When you reach 60 the last thing you want to worry about is your retirement.
However, to have a restful, secure and carefree retirement, you must build a financial cushion that will fund your expenses and lifestyle.
Retirement planning is a multifaceted process which starts with setting goals. The plan helps you achieve your objective and will determine your quality of life after retirement.
Although pensioners in defined benefit funds such as the Government Institutions Pension Fund (GIPF) enjoy the security of having guaranteed benefits, possible increases in medical and other living expenses may reduce their purchasing power. Just as events like these show the remarkable benefits of saving, it can also highlight the exact opposite.
Here are some tips everyone should take regardless of their age to prepare for and build a solid retirement plan.
1. Start early. Your current age and expected retirement age gives you the initial groundwork for an effective retirement strategy. The earlier you start, the higher the level of risk your portfolio can withstand and the longer your savings period will be.
The success of your retirement programme is directly determined by how you would like to maintain or improve your lifestyle during your retirement years. If you wish to travel and make more purchases, you must save more now.
Starting early is not necessarily just about retirement saving. It also includes paying off debts, including a mortgage, vehicle loans and any other significant debts before going into retirement. A common misconception is to look at retirement as a far-off event and thinking they still have plenty of time to save.
However, this has proven to be the exact opposite. Consider the following: As a young professional who has just entered the workforce, you think you still have a long way to go. Remember that a 58-year-old who is two years from retirement once felt the same. Now they may now find themselves in a situation where they have not saved enough.
2. Avoid withdrawals before retirement. One of the immediate temptations when you change jobs, is withdrawing your retirement savings for cash. Avoid this temptation at all costs. Remember, the cost of living increases every year. Retirees need more income because they are no longer at work for eight or more hours a day. As a result, we have more time for travelling, shopping, sightseeing, and engaging in other expensive activities.
As a member of the GIPF, you have guaranteed benefits for life after retirement. However, if you have invested in a retirement annuity plan that is directly dependent on how much you have saved, you may easily outlive your retirement savings.
To put this in perspective, if you wish to withdraw N$10 000 each month from your retirement annuity, given you have not saved enough and interest rates are low, your retirement savings may not be able to sustain you for the rest of your life. This means if you live longer than anticipated, you may end up with little or no income at all.
To avoid outliving your savings, you need to be mindful that the average lifespan of individuals continues to increase due to advancements in health care. Having a future outlook about your possible future expenses is paramount as it will give you an indication of how much more you ought to save.
If you change jobs, transfer your benefit to your new employer’s retirement/pension fund. To maintain a similar lifestyle as before retirement, you need an income replacement ratio of at least 75% of what you were earning before retirement. So, if you earned N$10 000 before retirement, you need to earn at least N$7 500 after retirement.
3. Take out additional retirement savings. The future is uncertain. Those who thought that they had sound retirement plans have since experienced a different reality, as they may have received little to no increases in their income or have had to take income cuts.
If you made early withdrawals, not all hope is lost. This simply means you will have to save more for retirement than you currently are. Therefore, in addition to what you are saving in your current retirement fund, it is advisable to take out a retirement annuity plan to supplement your income. Speak to a professional financial planner to assist you in this regard.
Retirement is your right to a period of leisure, and a moment of rest with the confidence that your retirement scheme will take good care of you.
Make the right choices today.
*Ignatius Manyando is the Manager: Annuities at the GIPF.