Picture: 123RF/FLYNT
Picture: 123RF/FLYNT

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How your retirement adventure unfolds is largely determined by the financial decisions you make before retirement. Whether you started saving early, spent your savings or reinvested them, and whether, at retirement, you withdraw more than the recommended amount from your retirement savings, will impact on how you live out your golden years.

This is the conclusion of a recent survey by financial institution Glacier by Sanlam of 82 South Africans who had retired with relatively comfortable monthly incomes. The following are some of the most common scenarios when planning your retirement.

Starting early

Your mid-twenties or earlier is the optimal age to start saving as it enables you to capitalise on compound interest.

As an example of the benefits of starting to save early, Patrick Sheehy, head of product management at Glacier by Sanlam, says if you saved R100 a month for 40 years starting at 25, you would retire with the same amount as someone who only starts at 45 and who puts away R850 a month.

By starting 20 years later, the second person has to save 8.5 times more each month. This calculation is based on your savings achieving a 10% return a year.

Delayed savings

If you are already close to retirement and have not saved enough, you urgently need a smart strategy. This includes a thorough examination of your budget and spending habits.

You will also need a carefully planned income withdrawal (drawdown) strategy after retirement. Remember, you can also take on a "gentler" secondary career, with part-time work to supplement your pension after retiring. It is possible to catch up, but it will take effort and expert guidance from a financial adviser.

Saving v spending

Should you resign prior to retirement for any reason, it is wise to preserve the retirement funds you have instead of spending them.

Sheehy says many people are overwhelmed by the size of their payout and are lulled into believing they can spend a significant portion of it and still have enoughfor the rest of their lives.

You should seek the guidance of a financial adviser to decide how much, if any, of your retirement capital to withdraw and what type of annuity to buy.

It is possible to withdraw up to one-third of your retirement savings from a pension fund or retirement annuity at retirement and with the balance you are by law compelled to buy an annuity.

An adviser can determine how much of your lump sum you should draw based on tax considerations, how much you will need over the next 20 to 30 years, taking into account any property or other assets you have or may consider investing in.

If you have reached retirement after withdrawing a lump sum from your savings and have spent it instead of reinvesting it, it is advisable you consult a financial adviser as soon as possible. You are going to be playing catch-up, so you will need to adjust your investment and withdrawal strategy accordingly, Sheehy says.

Drawing income after retirement

You may be tempted to withdraw more funds to live off than you can afford. A responsible withdrawal strategy is vital, and expert help can prove invaluable.

You will need to distinguish between essential needs such as rates and taxes, food and healthcare, and "nice-to-haves" such as travel. Plan and spend accordingly.

Your financial adviser will assist you to create and regularly review your withdrawal strategy, examining your essential versus nonessential expenses and adapting your strategy when your financial needs change.

Drawing too much eats capital

Sheehy says many clients whittle away their retirement capital by drawing between 8% and 15% of their capital as an income. The maximum you can withdraw from a living annuity is 17.5% of your capital every year, but it is prudent to withdraw around 5%.

If you're withdrawing too much, you may not be able to sustain an inflation-linked income. You may have to sacrifice some luxuries, but even your essential spending may come under pressure if you do not manage your withdrawals responsibly.

Sheehy says that to try and maximise growth on retirement capital, some advisers may put clients with aggressive draw-down needs, for example 15%, in high-growth assets, but this increases exposure to market volatility. It depends very much on the client's risk appetite and whether stability may not be the better option, he says.

You would have worked hard for most of your life; a financial adviser is invaluable to guide you to a full life in your retirement.

Glacier by Sanlam offers a wide range of investment solutions, designed to assist clients to create and preserve their wealth throughout their lifetime. These solutions include local and international investments, pre- and post-retirement solutions as well as share portfolios. We also offer a number of guarantee-type products for investors seeking certainty in the current market volatility. For more information, please visit www.glacier.co.za

This article was paid for by Glacier by Sanlam.

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