The dreaded or anticipated day has arrived. This is where the pedal hits the metal of the retirement car you have chosen to drive. Decisions have to be made that have to be the right ones. Except for the very rich, most retirees will have no room to manoeuvre, after they make the choices in this step.
A whopping seventy–one percent (71%) of pre-retirees want to continue working. In case you’re wondering-this number includes those who have prepared for retirement. Companies that are prepared to continue the employment with flexible work hours are valued for the stimulation and satisfaction. Often the retiree will state this is of a higher value than the actual pay check after retirement.
The truth is that retirement can be terrifying, even for those who have a good retirement income. For those who have a reduced income, it can be overwhelming. Money is naturally the one major consideration, but the ability to interact with human beings on a professional level fulfils a need in all of us. This social interaction is of prime importance.
At Retirement, there is an emotional rollercoaster ride as the sudden realisation hits, that there is no regular income with annual increases and 13th cheques. The first worry in the immediate future is how to pay monthly household bills. This realisation is coupled with the loss of those people you interacted with every day of your life. The initial period before the actual retirement may not be sufficient to come to terms with the enormous life style change. A process of grieving will begin. Denial and shock may be in the start of the process, rapidly followed by anger and frustration. The anger and frustration may display as pain and guilt, the health, possibly, will suffer. Such emotions require a pattern to be put in place to ensure regular, healthy sleep. A lack of sleep diminishes activity in the frontal lobe, which is associated with impulse control.
How can a person ensure they get sleep? Put in a routine to calm the brain down around a half hour before bedtime. Breathing exercises can help to calm the person down. Milky drinks, honey or herbal calming baths and drinks can all help. In ethno-medicine we use lime blossom in the bath and we may even give the person a banana and honey tea. Psoralea pinnata, camomile, lavender, lemonbalm and passionflower are all calming herbs which may be used. A visit to a herbalist or your doctor may be needed if sleep is elusive.
Be aware of the dangers that you could fall into, as this period unrolls. Addiction is common in this phase, the person may become addicted to things such as sport, ill health, drugs or alcohol.
This period however should pass quickly, if you are aware and alert to it and in the maturing process our next step will see the person bargaining with life, by reforming the lifestyle, selling the house, buying a 4x4, travelling or even helping out at a charity. However depression often follows as the feeling of self-worth erodes with the grey hair. Depression is also felt due to the death of family and friends. We will look at this stage in our section on post retirement. Just understand you are not alone. Many people battle to get to an acceptance stage, where they burst out the chrysalis of work life into the butterfly stage of retirement with purpose. The acceptance stage can be seen when the person embraces a retrospective view and stable emotions. They look forward to the future with a sense of responsibility and purpose.
Emotions as you see, will play a huge role in how you plan for your retirement at retirement.
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Bob and Ellie both worked until his retirement. They were financially well –off and considered retirement to be a chance to explore their beautiful country. At first they went away, but then Bob got consultancy work and did not know when he was needed, so he ended up wanting to be at home, in case work came in. Ellie became increasingly frustrated being stuck with Bob as her sole companion. Bob had become a couch potato, more than an intrepid explorer and consultant. Ellie now began to be increasingly angry with her life. This anger worsened when her eldest child moved back into their house from overseas with her two children and a difficult husband. Ellie felt used and abused. Her health began to suffer and soon she had full blown diabetes. Ellie now had a reason to say she could not do the things she was expected to do. Her blood sugar swings pushed her into frequent comas. Despite the hate she professed for the disease, she enjoyed the attention and the caring she was now getting. The daughter decided to move out the house far from her mother- this was a blow, as Ellie enjoyed the children’s company, so long as she was not expected to clean up and feed them. Eventually the son-in –law moved the family out of the country as he was offered work offshore. Ellie again had to clean up the mess they left behind. She became angrier and the anger created more health problems. Bob became her full time nurse and had his hands full with her mood swings, forgetfulness and sugar management. It became a real problem for Bob. He was not the type of person who was suitable to be a nurse, although he had stepped up to the plate, he also disliked his life. Things came to a head when Bob had a stroke and suddenly Ellie was having to cope with the loneliness and a husband who could no longer walk properly or drive her around. Ellie was fortunate in that she had access to exceptional psychological advice, from a person who knew the family well. On this person’s advice, Ellie met with her brother, who then asked the two if they could help him in his business. This was to give the couple a purpose in their life. Her brother responded with gratitude as the finances were in a mess. Ellie was a very proficient book keeper. Although her brother could not afford to pay her, it gave her the reason to start driving in order to manage the office. Bob came with and pretty soon was found fixing up the business property. Today Bob and Ellie still work at the brother’s business in managing it, but have their own lives back. The two of them have started organic gardening in their own property and are enjoying their lives far more than 5 years previously. Ellie still has brittle diabetes, but modern technology helps her to monitor the disease. She has also joined a Pilate’s class and both her and Bob have a sympathetic chiropractor. The Chiropractor was a person whom they knew well as a child, which allows them to talk to her, not only to help with the aches and pains. The chiropractor ensures she has long appointments for the two as she recognises their need for both social and physical interaction. Ellie’s take away is that you need the right people in your life, as money is not sufficient to give a person purpose. She knows now, that for her and Bob, family is important, but there also has to be a line in the sand. They have the line drawn- it allows them to help the family, but not to be taken advantage off. |
Why do we have to plan in retirement for retirement at retirement?
At retirement you change the retirement or pension fund lump sums into an income producing stream, called an annuity. Scary facts tell us that 40% of retirees take just 2.4 years to deplete the lump sum benefits they have provided. {5} For many people being given the lump sum is overwhelming. The sum appears larger than the income it can provide and temptation to spend it may override common sense. It is also not unusual for family members to just need a little help as you hit retirement, and the promises to pay back the money may not be fulfilled.
Pensioners have to make certain choices before retirement. While you are in the emotional pre-retirement stage you have to decide on annuities prior to retirement. For those lucky enough to have a defined benefit pension funds, giving a defined income, the chance of getting a similar performance outside the pension fund on those monies, is often slim to none. In the defined benefit fund the income is known and is fairly safe. You should try and reduce your spending to match this amount. For a person in a defined benefit fund retirement does not have to be timed. For the rest of the population we have to look at a variety of different methods to insure an income.
On retirement there may still be liabilities owing. Liabilities include all financial obligations (housing bonds, debt) as well as family obligations. Liabilities where possible should be paid up before retirement, unless the return on investment exceeds the cost of the liability.
The income choice has to be made between a fixed or conventional annuity and the living annuity. We will look at annuities in detail in our next chapter. Before we choose we need to not only understand the annuity but also inflation expectations. We will also have to understand bond prices and interest rates which in turn affects the cost of a purchased annuity.
If you are in a defined contribution fund, try not to retire when the economy is down and in a bear market. A Bear market is where the share market is losing money. A rising market is preferred for retiring if you do not have that defined benefit fund.
Timing, when you buy a fixed or conventional annuity is critical. If inflation rises, interest rates tend to go up, and the cost of the annuity falls, so you receive a bigger monthly income for your lump sum. You ideally want a high interest rate for the purchase of the annuity. If you have to retire in a low interest rate environment, make use a living annuity, until the market changes and then if required, buy into a fixed or conventional annuity, when annuity rates rise. . An annuity is a financial product sold by insurance or pension companies that pays monthly, quarterly, bi-annual or annual payments to a person, for as long as he or she lives. Annuities are usually purchased by investors who want to secure some type of income stream during retirement. Which annuity you get, will depend on your financial knowledge and the capital you have accumulated. Annuities vary considerably. We will look at these in more detail later in the chapter on annuities.
Annuity rates vary considerably as a result of age as well. A fixed annuity amount will vary between insurers and a million will normally buy around 6000 per month at age 65 for a male or 5 400 for a female. There is up to a 3% per annum increase, in the amount an annuity will pay, for every year you delay retirement. Planning at retirement must take into account your life expectancy. This is crucial to you at the point of retirement. Those in good health may feel they will continue to experience such a situation, while those who are sickly may decide to have a reduced annuity. Both approaches may be wrong.
It is not unusual for a retiree to have the need to reduce the lifestyle substantially due to retirement. Budgeting during the period, before retirement, takes a lower priority to after retirement. This is due to life style changes that take place when we get more income, due to career progression and less expenses, as children and other dependants no longer are a continual drain on the finances. In addition we often forget the impact of the life changing events, which may happen, such as a marriage of a child or frail care for a parent. These payments can dramatically impact on a retiree if not planned correctly.
When the income from the annuity starts to reduce, the pensioner may not find another job due to age discrimination in the work place. Contract work may not be easy to find given the current economic environment except for those with essential skills. What will worsen this scenario are the technological advancements that lead to our longevity, as these also result in one of the top expenses for us all in retirement, namely a medical scheme or medical health care.
When hitting the expenses, an immediate kneejerk reaction is that many retirees decide to cancel their existing risk policy contracts as a quick solution, to increase affordability of higher priorities. This could result in you becoming uninsurable, if you want to buy another property to rent out, or open a business and obtain a loan. In order to understand our situation, let us look at the tools we normally use at retirement.
This period at retirement marks at what we call the “Decumulation Phase”. At this point you have to start living from the balance sheet and not from an income statement. Effectively you can deplete your capital very fast. In this book we are going to look at that very carefully in our section on post retirement, to help you not run out of money.
Your pension fund may have an offering of an in fund annuity, which is normally linked to a large fund or an out of fund annuity. Out of fund always means the fund is run via an insurer and this has certain implications for the retiree
Out of fund means the annuity is not subject to any Pension funds Act and so can be left to any person, if a living, death benefit or guaranteed period annuity is bought. The risk to the person taking the annuity is that the insurer goes out of business. In fund, the fund will first apply the requirements of the relevant pension and tax acts, which normally means they need to look at the dependants first and only then does the balance of monies go to any appointed persons, these persons are named the beneficiaries. Another major difference is an in-fund annuity cannot include any external funds you may have saved, while the out of fund can take these savings into account, this may help in negotiating of the costs of the fund management.
The pension fund will normally request a PRI (post retirement interests) from the member in order to give advice as there are a number of annuity options, all dependant on what you actually have saved.
Pension fund annuities mean there is a written agreement, between an insurance company and a customer, outlining each party's obligations in an annuity coverage agreement. This document will include the specific details of the contract, such as the structure of the annuity – does it pay monthly or quarterly or annually. It will also specify the amount payable for that period. The agreement will list any penalties for early withdrawal, (if that is permitted), spousal provisions such as a survivor clause, and rate of spousal coverage, and more. Pension funds will buy an annuity with the lump sum for the member on retirement from the fund. In some cases this is a legal obligation, while in other situations the setup of the fund will determine the obligation to purchase an annuity. Countries also will have different requirements; for example, in the UK income based levels determine the requirement to buy an annuity with 75% of the lump sum from an approved fund.
South Africa currently, does not require a provident fund member to buy an annuity at retirement. The same situation will be found from existing preservation funds and you can take a single withdrawal, if you need cash to supplement immediate lifestyle costs, without withdrawing from the fund before retirement.
All withdrawals from any fund will be subject to a lump sum taxation, with an initial amount allowed tax free and the balance taxed on a table that is set by the tax authorities. Once tax is paid you cannot get it back, so it is advised to ensure that only the tax free amount is taken as a lump sum or the minimum amount you need. This tax free amount is a once of amount allowed throughout the individuals life time, and will be reduced or even non-existent, if you took a withdrawal before retirement, such as on a retrenchment package. Withdrawals from both a provident and pension fund may be taken on leaving a company, retrenchment or retirement depending on the country you are in.
Personal pension funds have many names ad flavours. These are individual retirement funds taken outside the employment or compulsory country retirement savings requirement, for additional retirement savings.
Individual retirement funds are known as private pension funds or retirement annuity funds. Retirement annuity is the name to the pre- pension saving and they are so called because the funds have to be used to purchase an annuity after retirement subject to certain conditions. In the USA there are a variety of Retirement Annuity accounts used by employers outside the 401 (k) plan. The USA will also use Keogh or HR 10 plans.
Individual retirement funds differ depending is they are approved or unapproved by the tax authorities as retirement plans in that jurisdiction. Plans that do not meet the guidelines required to receive a favourable tax treatment are considered nonqualified and are exempt from the restrictions placed on qualified plans.
International retirement plans are found in jurisdictions such as Guernsey. Guernsey is a favoured spot for Individual retirement funds in Sterling, Euro, or US Dollars. Income and capital gains arising from the investments held within the plan, or benefits paid by the plan, are not subject to Guernsey Income Tax.
At retirement you may decide to make existing approved Individual retirement funds /Retirement Annuities (RA’s) paid-up. Again depending on the country, the condition of the approved Retirement annuity is normally to buy an annuity with majority of the lump sum. This annuity is based on your lump sum and pays you an income. Depending on the type of annuity the income should be paid until you die or run out of money in the capital (lump sum) account.
While the pension or provident fund may be dependent on age and necessity to take a partial or full withdrawal, individual retirement funds or retirement annuities, in most countries do allow for later retirement with higher limits on membership than the employer would have. Allowing for later retirements has a benefit to these funds and the people investing in them, as it allows a longer period of contributions. Before you do convert your individual retirement funds /retirement annuity, please do a financial needs analysis prior to retirement and if necessary choose to receive financial advice in retirement.
We will look at the various annuities you can buy and which are readily available in the next chapter.
In our section on Managing the finances we will look at the various investment types to help you understand how you should invest to make the money last.