Retirement planning in the time of Covid

Retirement planning is daunting at the best of times, but against the backdrop of Covid-19, it is an even more intimidating task. It is time to start looking at retirement differently.

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Retirement matters – to everybody. Generally, it is our biggest asset and one we spend years and years accumulating. It is no surprise therefore that there are a lot of decisions to be made with regards to these savings as we draw near to old age – decisions which have long-lasting impacts.

Making these decisions at the best of times is daunting – but against the backdrop of Covid-19, it is an even more intimidating task and, understandably, people feel vulnerable, regardless of the retirement savings they have accumulated.

What should you do if you are preparing for retirement?

For many people it’s time to start looking at retirement differently. The reality of retirement has changed. The savings one has accumulated at retirement are no longer guaranteed to last through your retirement years due to higher costs of living, the effects of forces like inflation and longer lifespans.

Encouragingly, the engagements that the Nedgroup Investments team has had with people approaching retirement reveal that many people see this stage of life as an opportunity to reinvent oneself. While retirement from formal employment is likely, many people are open to other avenues of generating income thereafter.

Ensuring a sustainable retirement capital is crucial. Staying informed with regards to your financial affairs, keeping in touch with financial experts and practicing responsible spending are still paramount for people approaching or in retirement.

What if you need money now due to Covid-19?

Many people have been made redundant or have fallen on hard financial times as a result of the Covid-19 pandemic. No amount of planning could have prepared people for this kind of event, so it’s important to remain realistic in terms of financial needs.

Before dipping into retirement savings, the best place to start is with your general savings. The second option is to use your tax-free investment. However, remember that your tax-free savings currently have a lifetime limit – so if you withdraw from this, you cannot replace it and you would be foregoing the long-term tax-free savings. The final option is to use your retirement savings, if they are accessible.

The Nedgroup Investments MyRetirement Solution
offers an in-person and online support system designed
to help people make better decisions about their
retirement investments.

For those who are not yet 55 years old and have a preservation fund, you are permitted to make one withdrawal. However, you would not be able to access the money in your Pension or Provident Fund, if you are still employed.

If you are in the unfortunate position of having been retrenched, you have the option of taking a cash portion from your retirement savings, which will receive favourable tax treatment. The important consideration to be aware of here is that you are reducing your tax benefits at retirement.

Tracy Jensen, Senior Investment Analyst, Nedgroup Investments

On the other hand, if you are 55 years or older, you have the choice to retire from any Preservation Fund or Retirement Annuity Fund that you may have. If you choose to retire, you will have to commit to a minimum withdrawal amount. This needs to be carefully considered. The important thing to balance is your need for income now and your long-term need for income.

Can you afford to retire early?

An analysis of the income you plan to take in retirement will give you a real sense of how achievable this is for you. A survey of people approaching retirement revealed that, generally, people overestimated the income they assumed they could draw down in retirement by about two to three times.

The Nedgroup Investments MyRetirement Solution offers an in-person and online support system designed to help people make better decisions about their retirement investments. Book a free, no-obligation session with our retirement coach to help you answer the question of what a sustainable income is for your circumstances.

What impact does delaying retirement have?

There is also the option to defer retirement. Delaying retirement by just three years can have a huge impact on your position in retirement. This is due to you contributing towards your retirement fund for three extra years and that you will be drawing an income for three years less. In addition, the power of compounding is most effective in the final years before retirement. The cumulative effect of delaying your retirement by three years has a six- to nine-year benefit.

Another good tip is to use the years leading up to retirement to deleverage your finances to reduce the burden on you in retirement.

The cumulative effect of delaying your retirement
by three years has a six- to nine-year benefit.

How much money is enough to retire?

Calculating how much money you need to save for your retirement is a conundrum for most people. Using tools like the Nedgroup Investments MyRetirement Solution is an advantage.

Some important things to remember when deciding how much is enough to retire on:

  • You should grow your income relative to inflation. Inflation is the silent killer to retirement savings.
  • Consider your medical costs as they generally increase above inflation.
  • Study your expenses and be realistic about what you absolutely need to live on and what is “nice to have”. This will give you an idea of what retirement income you will need.
  • A rule of thumb is to aim for a retirement income of 60-70% of your final salary.

What are the options in retirement?

At retirement you typically have two options of how to use your retirement savings to provide you with an income:

  • Life annuity
    A life annuity provides a guaranteed income for your (and your partner’s) life with set increases. However, you are not able to leave capital as inheritance. You also have no flexibility to amend your income or change providers in future.
  • Living annuity
    A living annuity, on the other hand, allows one to choose your income each year. It is market-related and will fluctuate depending on the performance of its underlying investment portfolio and therefore does not guarantee that the income will last. With a living annuity, it is possible to leave money behind as inheritance.

Each annuity has pros and cons, so choosing one annuity seldom meets all a retiree’s needs.

Liezel Momberg, Head of Legal, Nedgroup Investments

Another option is to split your savings at retirement and purchase both a life and living annuity. Currently, the law neither prohibits nor allows the purchasing of multiple annuities, so it is worth checking with your provider what they allow.

The best of both worlds: Nedgroup

Nedgroup Investments offers the Living Annuity Plus. Designed to address the most typical concerns and limitations of traditional annuities, the Living Annuity Plus effectively provides longevity protection while still allowing retirees the flexibility to select their income and enabling provision for an inheritance.

Free retirement coaching session

The MyRetirement Solution has a dedicated and experienced retirement coach available to help people approaching retirement develop a plan for their unique needs and expectations. The coach is available to them for life and can walk pre-retirees through several scenarios with the tool so that they can see the impact of their retirement decisions before making them. 

For more information, visit https://myretirement.nedgroupinvestments.co.za/en/