Money mistakes to avoid during retirement

The 10X Investments Retirement Reality Report 2023/2024 makes for uncomfortable reading.

With only 6% of South Africans on track to retire comfortably, you need to make sure you’ve thought of everything that might impact your retirement planning.

Which begs the question: how do you avoid the common financial mistakes people make when they retire?

Andre Tuck, a senior retirement consultant at 10X Investments, has spoken to thousands of people about their retirement plans over the course of his career. Here, he shares the most common areas for concern: 

Choosing the wrong pension product: living annuity vs life annuity 

When you retire you are obliged by law to use at least two thirds of your retirement savings to buy an annuity, which will pay you an income in retirement (a pension). You can choose between two types of annuity: a guaranteed (also known as life) or a living annuity.

With a life annuity, the insurer pays you a specified monthly pension for the rest of your life. Choosing a life annuity insures you against longevity risk (the risk that you outlive your savings) as well as investment risk (depleting your capital too soon due to inadequate investment returns).

You do not, however, have any control over how your money is invested nor any flexibility to draw a lower or higher income when your expenses change. Also, your policy dies with you, and no money passes to your heirs.

A living annuity transfers the risk and responsibility for 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 careful evaluation of your personal needs and circumstances. This is a critical decision — with income, tax, estate planning and risk implications — so you should consider your options carefully before committing. 

Underestimating your expenses   

Your financial situation is likely to change during retirement and it's key to keep your budget up to date so that you can respond confidently to sudden expenses or opportunities. A vague plan based on the assumption that you’ll be spending less money in retirement simply isn’t good enough.   

The Brand Atlas Survey, which tracks the lifestyles of the 15-million economically active South Africans (those living in households with a monthly income of more than R8,000), found that just 7% of savers have full confidence in their plan. This confirms that vague ideas aren’t enough: you need a plan that’s workable, realistic and up to date.

The same goes for your budget. A guesstimate won’t help much — you need to get into the details.

While expenses such as travelling for work or bond repayments are 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 Stats SA, most causes of death in SA are attributed to non-communicable diseases such as stroke or heart disease, manifesting mostly in older people. 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 manage your money, instead of allowing it to control you.

Drawing down too much   

Brand Atlas found that 79% of those who do have a retirement savings plan (up from 75% the year before) are unsure they will have enough money to maintain their lifestyle in retirement.   

Retirees who have selected a living annuity, rather than a life annuity, get to have some control over their money in retirement, as well as leave an inheritance. That flexibility comes with the responsibility to calculate a sustainable drawdown to ensure they avoid outliving their savings.   

When calculating how much money you can draw each year you need to consider among other things, your time.   

There are other ways to apportion your savings. It is important to do your research and consult with your fund provider or financial adviser about choosing the approach that is best for you.

Financial planning tools, such as the 10X Living Annuity Calculator, can help you find your optimal sustainable drawdown rate, based on your estimated life expectancy and other parameters.

Paying high fees

While most retirees know that their drawdown rate is an important lever to ensure their savings last, few realise that the fees on their living annuity are likely to be their single biggest expense in retirement.

The Retirement Reality Report found that 50% of retirement savers don’t know what they are losing to costs or say there are no fees at all (which is obviously wrong).

To illustrate the cost of high fees, assuming a drawdown of 5% from a R4.8m pension pot, a retiree would receive a pretax income of R240,000 per annum (R20,000 per month). Paying fees in the region of 3% per annum — usually made up of advice, administration and investment management fees — they would be paying costs of about R144,000 per annum (R12,000 per month), meaning almost 60% of their drawdown is spent on fees.

Retirees who are unsure of the fees they are paying can ask 10X Investments for a free, no-obligation cost comparison to clarify their investment expenses. Alternatively, use 10X Investment's EAC calculator.

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. But giving in to your emotions and switching when the market is down could likely 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.

It is important that retirees manage their retirement savings in a way that is sustainable so that they don’t face the prospect of running out of money — or spend precious years worrying that they might. 

If you’d like to leverage 10X Investment's retirement consultants’ decades of experience, contact the company today. There are no call centres, just experts ready to help.

This article was sponsored by 10X Investments.

_{10X Investments is an authorised financial services provider (FSP number 28250). The content herein is provided as general information and is not intended as nor does it constitute tax, legal, investment or financial advice as defined by the Financial Advisory and Intermediary Services Act, 2002. • The 10X Living Annuity is underwritten by Guardrisk Life Ltd. • 10X Fund Managers (RF) (Pty) Ltd is an approved manager of collective investments schemes in securities in terms of Section 42 of the Collective Investments Schemes Control Act, 45 of 2002.}