Ensure your retirement is both happy and relaxed by learning from the mistakes happy retirees don’t make.

Happy retirees don’t leave it to chance

Happy retirees don’t retire on a whim after a bad day, week or month at work. They plan and carefully consider one of the largest financial choices they will ever make.

We’d highly recommend making this major decision in consultation with an adviser who specialises in retirement planning. Retirement is an expert investment field which proves the old adage: failing to plan is planning to fail. Yet far too many people face a retirement for which they haven’t planned enough.

Happy retirees don’t invest too conservatively

If you’re retiring on a pension fund or a retirement annuity, you’ll have the option of taking one-third of the amount in cash, while you are required to use the balance to purchase a compulsory annuity (a financial product from which regular payouts are made over time) such as a Living Annuity. The asset allocation of both the cash component and the underlying investments in the Living Annuity is fundamental to ensuring that your savings grow more quickly than inflation.

Successful retirees plan for a long retirement and allocate their funds based on both their income and their age at retirement. Some investment specialists recommend protecting your income for at least 10 years (i.e. allocating this portion to relatively conservative assets) while allocating the balance to riskier assets which will show greater growth in the longer term.

The lower the level of income that you take regularly from your investments, the more risk you can generally assume. This is because you don’t have to dedicate a large portion of your investments to conservative income-producing assets. This is illustrated in the asset allocation underlying Prudential’s Living Annuities. Currently, if you select the Prudential Living Annuity that’s structured for a 2.5% income level (i.e. a fund where you withdraw 2.5% of your total savings every year), 42% of the fund is allocated to SA Equity and 22.6% to foreign assets. This allocation assumes more risk than the Prudential Living Annuity which is geared for a 7% income level, which is currently allocated to 7.1% in SA Equity and 5.4% in foreign assets.

Many advisers apply the so-called 4% guideline, which states that if you withdraw 4% of your Living Annuity (adjusted for inflation every year), with equal allocations in equity and bonds, your nest egg will last for at least 30 years. Your adviser may be guided by this rule if you select Prudential’s self-managed Living Annuity option.

Happy retirees don’t fear the tax man

Successful retirees have tax plans. They are aware of the lump sum taxes that may be applied to the cash withdrawal from their retirement fund, but they also consider the exemption, which allows a tax-free withdrawal of R500 000 (providing no other withdrawals have been made) from retirement products. This means that if, for example, your one-third withdrawal comes to R1 million, the first R500,000 will be tax-free.

Successful retirees are also aware of the capital gains tax that may arise from the sale of their business or home. Following the Income Tax Act, 40% of the capital gain is added to your income before being taxed at your marginal tax rate. There is, however, an exemption of R2 million on the gain on your primary residence and R1.8 million on the sale of a business that doesn’t exceed R10 million in asset value.

When you receive income from a Living Annuity, it will be taxed at your marginal tax rate. The tax can be deducted from the fund and transferred directly to SARS. It’s helpful to set your tax rate at your marginal tax rate (which may be higher than the default rate) as this may assist you from being an unnecessary provisional taxpayer.

Happy retirees plan for liquidity

Happy retirees maintain a degree of liquidity (or ease of access) in their estate. It’s easy to lock all your money up in long-term bank deposits or Life Annuities purchased with discretionary funds, but this should be avoided as unexpected expenses will occur in retirement. Investing in funds like Prudential’s Money Market and High Yield Bond unit trusts are a good way of maintaining a sensible level of liquidity in your estate.

Liquidity is also important when it comes to estate planning. If you would like to leave some assets in their entirety to an heir and don’t have sufficient liquidity in your estate, your executor may have to sell some assets, including unit trusts, to pay estate duty and income tax. This potential knock can be overcome by planning in advance for these taxes. You could also nominate your estate to be the beneficiary for part of your life assurance proceeds (should you have life cover), to cover taxes applied to your estate.

Happy retirees don’t lack purpose

The greatest challenge of retirement is to live out your golden years with purpose. Many people go into retirement under the false impression that their wealth alone is going to give them happiness, but this is rarely the case. Happy retirees know what they want to do, where they want to do it and who they’d like to share their retirement with. This could include a new, lower-key job, volunteer work, that hobby you never started up, or even going back to university.

Happy retirees keep a ‘final file’

Confident and content retirees maintain the dreaded final file! Dealing with loss is hard enough as it is, so why not make it easier for your family, heirs and executor by having all the documents related to your estate plan in one tidy file? This file should contain your:

Last will and testament
Letter of wishes
Living will
Power of attorney
Deeds to property
List of assets and liabilities
Bank numbers
Car registration documents
Family members’ names and contact numbers
Living annuity beneficiary details

Like investing, estate planning is not a ‘set it and forget it’ scenario. Your estate plan must be maintained and updated every couple of years to ensure that you have addressed important changes that may have occurred in your life.

Golden years

It goes without saying that happy retirees have sufficient wealth with which to fund their retirement. The only way to achieve this is by investing realistically throughout your working career. You can use Prudential’s retirement calculator to assess whether you can afford to retire. Remember to be realistic about the long-term growth of your funds, as an unrealistic figure may give you the false impression that you have an excess of funds. You could use Prudential’s Balanced unit trust performance as a guideline, which has been 10% p.a. (including inflation) over the last 10 years.

Speak to a financial adviser when planning your retirement or find out more about Prudential’s unit trust funds and Living Annuities by contacting our Client Services Team on 0860 105 775 or at query@prudential.co.za for more information.