There are many ways to prepare for and to manage the practical and financial aspects of the transition, some of them are listed below. As for the personal and spiritual side of things, there are as many opportunities and solutions as there are dreams among the working population. Read about those in "How to stay healthy, happy and sane after retirement."
1. Make a plan
The best place to start is with a pen, paper and some introspection.
Nathan says: “Even if you don’t follow the plan with any vigour the planning process will force you to identify and confront the beckoning issues.”
The plan should set out your goals, and how you intend to fund them. Your primary goal will likely be to maintain an acceptable lifestyle, covering your accommodation, food, healthcare, transport, communication and entertainment.
Beyond the basics, you may have aspirations around travel, recreation and personal development. Further, you will want ready access to funds to meet unexpected emergencies and capital purchases.
“Each of these objectives has a different time horizon, which should instruct how you apportion and invest your savings,” says Nathan.
“You may have to fund your normal living expenses for decades, which means you should invest this money with a long-term perspective. Emergencies happen unexpectedly, so you don’t want to expose any emergency fund to short-term risks.”
2. Manage your retirement fund proceeds
As a member of a pension or RA fund, you are allowed to take up to a third of your proceeds as a cash lump sum (the limit falls away if the fund value is less than R247,500). With the balance, you must buy an annuity. With a provident fund, you can claim the entire proceeds as a lump sum.
Cash lump sum confers certain tax advantages: no tax is charged on the first R500,000, the balance to R700,000 is taxed at 18%, the balance to R1,050,000 at 27% and the remainder at 36%. This table is applied to the aggregate of your retirement fund lump sum benefits claimed since 1 October 2007.
The cash lump is tempting in light of the low tax rate applied and the flexibility it confers.
Remember though, says Nathan, that that the intended purpose of your retirement fund is to provide you with adequate income throughout your retirement years. It is not to buy a new car or set of power tools, start a business or finance a long holiday. It makes sense to rather set this money aside as your emergency cash reserve.
The cash lump sum will reduce the amount available to purchase an annuity, meaning you will receive a lower monthly income for the rest of your life.
3. Choose between a living and a life annuity
You can choose between two types of annuities: a guaranteed (life) annuity or a living annuity.
With a life annuity, the insurer pays you a specified monthly pension for the rest of your life. This insures you against longevity risk (the risk that you live longer than expected) as well as investment risk (depleting your capital too soon due to inadequate investment returns). One drawback is that your policy dies with you, and no money passes on to your heirs.
The living annuity transfers the risk and responsibility of securing an adequate income for life to you. In return, you have greater investment, and income flexibility and your heirs inherit whatever is left of your capital after your death.
Choosing between a living and a life annuity at retirement requires a careful evaluation of your personal needs and circumstances. This is a critical decision – with income, tax, estate planning and risk implications – so you should use an appropriate retirement planning tool, such as the 10X Retirement Planner, or consult your financial advisor, to find the solution most appropriate for you.
4. Manage your discretionary savings
If you decide to claim your provident fund as a lump sum, or you have gathered a substantial amount of non-retirement savings, you should also put some thought into how to manage this money so that it works optimally for you.
You may think that the safest and simplest bet is to put your money into a savings account and live off the interest. But the effect of inflation will mean that the purchasing power of that interest income (and your capital) will decline steadily. It will also not deliver a consistent income, as interest rates change.
Nathan says you must always consider your time horizon. “If you anticipate some big near-term expenses (such as travel or home renovations) it makes sense to ‘preserve’ some of this money in a savings account,” he says.
But, Nathan adds, If you plan to draw a regular income from these savings over 10, 20 or more years, you will need to invest the balance with a long-term perspective and an eye to achieving inflation-beating growth.
“Historically, the share market has been the most reliable way to build wealth.”
He adds that putting some money into the sharemarket will most likely sustain your required income for longer. The simplest way to do this is by investing in a low cost, balanced (multi-asset) unit trust fund, such as the 10X Prime High Equity Fund.
5. Right-size your life
Before retirement, it was up to you to build a savings pot commensurate to the lifestyle you desired in retirement. Once you retire, you need to deal with what you have and adjust your lifestyle to what you can afford.
“There are ways to stretch your savings, for example by using a low-cost living annuity or investing in a growth portfolio rather than a defensive one, but there are limits,” says Nathan.
Perhaps you will need to make a few minor lifestyle adjustments, such as a more affordable car, or it may require a more drastic change, such as trading down on your living arrangements.
“Either way it is better to make changes in a structured, thoughtful way before they are forced on you.”
6. Think about your estate
If you have not already done so, now is the time to get your affairs in order. Draw up, or update, your will, and any nomination forms on your policies to reflect your latest intentions and circumstances. The principal concern for many will be to secure their partner financially, before considering any other bequests.
7. Leave detailed instructions
In most relationships, duties are separated with one partner perhaps taking care of household matters, the other of financial affairs; one may solve domestic issues while the other is in charge of technical problems. Also, couples have separate sources of income, run their own bank accounts and split the bills in various different ways. “At some point, one of you might become responsible for everything, so it’s best to share all the information beforehand,” says Nathan.
Inform your partner about the bills you pay and how you pay them, account details and passwords, sources of income, as well as assets, liabilities and policies. Make a list of the important contact people and their details. Make your partner aware of periodic dues, such as the AA subscription, TV licence payment or club membership dues. Give them a copy of the post box key and tell them where you keep your spare car key. Explain your filing system and share login details for your electronic devices and internet sites.
On an even more mundane level, provide instructions on how the washing machine, the dishwasher, the sprinkler system, electronic gate and pool pump work. Draw up and share a directory of your regular service providers, domestic workers, family and friends.
Modern technology has simplified our lives, provided we can access and understand it. If not, even simple tasks can become insurmountable problems.
Even if one has longed for the demands of working life to come to an end retirement brings with it many challenges. Says Nathan: “A little careful planning and thought can go a long way to reducing the stress of one of life’s great transitions.”