Many South Africans are under immense financial pressure due to rising prices and interest rates.
According to the 10X Retirement Reality Report 2022, just 7% of respondents feel confident that they are on course for financial independence in retirement, with the other 93% accepting that they will probably have to supplement their income after they retire. Below, Andre Tuck, Senior Investment Consultant at 10X, outlines three common financial mistakes for retirees to watch out for.
Underestimating your expenses
Your financial situation is likely to change during retirement and it is key to keep your budget up to date so that you can respond confidently to sudden expenses and opportunities that come with costs. A vague plan based on the assumption that you’ll be spending less money in retirement will probably end in disaster. This indicates that there is a need for a plan that is workable, realistic and up-to-date. The same goes for your budget; a guesstimate won’t help much.
While expenses, such as travelling for work or bond repayments, will likely fade away when you retire, your spending will probably increase in other areas, such as medical expenses. Healthcare is an important area to consider when planning your retirement budget. According to Statistics SA, most causes of death in South Africa are attributed to non-communicable diseases, such as stroke or heart disease, manifesting in late ages. If you don’t provide sufficiently for healthcare, your retirement could become a costly and stressful exercise in paying off medical bills.
Another factor to consider is that as a retiree you might find yourself looking for ways to fill your time. The cost of hobbies – such as travel, eating out, sports and other entertainment – can really add up. Create a detailed and realistic budget to help you to manage your money, instead of allowing it to control you.
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Paying high fees
There is no doubt that high fees are a contributing factor in South Africa’s retirement crisis. Seemingly small regular charges against savings compound to leave a large hole in pensions. It is very concerning that according to the RRR22 a staggering 15% of members of corporate retirement savings funds believe that the company that manages their fund doesn’t charge a fee for the service. Another 41% have no idea how much they are paying in fees.
To illustrate the cost of high fees, assuming a drawdown of 5% from a R4,8 million pension pot, a retiree would receive a pre-tax income of R240,000, or R20,000 per month. At the industry’s average fee of almost 2% pa (typically made up of advice, administration, investment management fees) they would be paying costs of around R96,000 pa (R8,000 per month), meaning they are paying themselves only two-thirds more than the service providers. Or, from another perspective, almost 40% of the drawdown goes on fees.
Retirees who are unsure about the fees they are paying should ask 10X Investments for a free, no-obligation cost comparison.
Panic selling when the market is down
Investing in growth assets has proven to be the best way to increase your wealth. Inevitable periods of market volatility may, however, test your nerve. You might feel the urge to panic and change your asset mix when you see a sudden sharp drop in the value of your portfolio. Giving in to your emotions and switching when the market is down will merely lock in your losses and leave you with the prospect of a permanently lower income thereafter.
Based on global life expectancy figures (as reported by the World Health Organisation in 2020), individuals who retire at 60 are likely to live another 15 years or more, which means they have time on their hands to ride out bouts of market weakness and recover any losses. The trick is to keep your eyes fixed on your long-term horizon and not react to short -term market events.
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It is important that retirees manage their retirement savings in a way that is sustainable so that they do not face running out of money before time or spend precious years worrying that they will.
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The content herein is provided as general information. It is not intended as nor does it constitute financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). 10X Index Fund Managers (RF) (Pty) Ltd is a Manager registered under the Collective Investment Schemes Control Act, 2002. The 10X Living Annuity is underwritten by Guardrisk Life