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By Tanita Conradie*
The extreme market volatility and uncertainty of the past two years have been a rude wake-up call for investors who had been feeling secure in their retirement plans. The market corrections of March 2020 and early 2022 have caused sleepless nights for investors as they worry about the impact on their retirement savings.
This concern is completely understandable. Whose future projections would have included a global pandemic that is still causing havoc more than two years later, or Russia upsetting the global order by invading its neighbour?
These are both extreme events that have been amplified because they are happening at the same time. So, I think it is fair to say that not many would have been prepared for this level of disruption.
These may be extreme examples of risk that retirees face, but there is little you can do to prevent them. That does not mean you do not have options when facing any of the following four risks.
1. Longevity risk
As much as we praise medical and biotechnical advances that fight common diseases or allow us to live longer, the reality is we then need to sustain ourselves for longer. Unless you are prepared for this possibility, then chances are you could outlive your savings.
This is a very real challenge if your retirement assumptions have not kept up with the latest thinking about retirement age and how long you are expected to live. According to the World Bank, the average life expectancy in South Africa has risen from less than 49 years in 1960 to 64 years in 2019.
CNBC also reports that longevity is the biggest financial risk that they face.
You can navigate around this risk by choosing a life annuity rather than a living annuity when you retire. The former is a sensible option if you fear that you will outlive your funds because it pays you a guaranteed monthly income for life.
This option does have some drawbacks – specifically that your heirs will not receive any pay-out if you die at a younger age than anticipated. My suggestion is that you consider this option, but that you invest the bulk of your savings in such a product but keep a portion in other instruments to give you liquidity.
2. Market risk
In the same way that life expectancy is rising, we also know that markets will continue to rise over time. If you are in or close to retirement, then time is the one luxury you do not really have and therefore face greater risk from market dips.
Retiring during a bear market is far from ideal, especially if your portfolio is heavily weighted toward listed equities or other asset classes currently under pressure. You can reduce your risk to some degree by speaking to a financial advisor who will be able to give you an impartial opinion of your best way forward.
If you have been working with an advisor, then hopefully you have been reducing overweight exposure to risky assets as you have approached retirement age. Getting this rebalancing of your portfolio right is crucial because being too aggressively positioned increases your exposure to market volatility, while being too conservative may leave you short of money.
3. Expected and unexpected expenses
As much as we would like to believe that life gets simpler in retirement, the reality is that life’s hurdles and speed bumps do not simply disappear. So, unexpected expenses for emergencies should be expected and catered for. As should the inevitable costs associated with healthcare and elderly care.
You can avoid unnecessary financial stress by continuing to maintain an emergency savings fund for unexpected emergencies. And the best protection against the possibility of serious health scares is to take out a risk policy, ideally in your younger years, to cover critical illness for your whole life.
Another form of protection you can consider is medical aid gap cover that helps pay for medical expenses not covered by your medical plan.
Also, bear in mind your future elderly care plan and costs. A nursing home equipped with the necessary facilities and expertise may be the best medical option for you but be aware that this comes at considerable cost.
4. Family commitments
Family remains family, no matter what age you are. Which means that circumstances may mean making sacrifices to help your loved ones in a crisis.
Risk and life insurance for you and your family is the best way to protect against the unknown, while putting in place a succession plan helps to remove many uncertainties. The first step in this direction is to draw up a will so that your family’s future is not determined by outside parties and rules as dictated by the Intestate Succession Act.
Without a valid will, all assets in your estate are frozen and could take months to be finalised, leaving your family financially stranded. All it takes is to draw up a legal will, which we are happy to help you put in place.
Your future may not be free of risks, but it does not have to be full of uncertainty. Planning for your future well-being is a life-long pursuit that is always easier when you have a skilled advisor at your side. Let us help you avoid these common retirement mistakes and build a prosperous future.
- Tanita Conradie, CFP® professional, is a Financial Advisor at Brenthurst Pretoria