Vital decisions for retirees

Vital decisions for retirees

Managing your finances and planning for your future do not end when you retire. If anything, you need to be more active in managing your money, because mistakes made in retirement can be far more damaging than pre-retirement slip-ups.

You cannot afford to make any mistakes, because it is unlikely that there will be another opportunity to get it right. You have to make decisions about a range of important issues, including what you want to do in retirement and how to structure your income.

Your retirement date

By the time they retire, very few people have saved enough capital to support their pre-retirement standard of living. This means they must postpone their retirement, reduce their standard of living, depend on the assistance of others and/or find another form of employment “in retirement”.

You need to start calculating long before retirement whether you can actually afford to retire and what you will do to make up the shortfall in capital. It is not something that can be left for the day you retire or are ‘retired’ by your employer.

The best way to assess whether you can afford to retire is by calculating the percentage of your current income you will need as an income in retirement. This is known as your replacement rate (or ratio).

Calculating your replacement ratio is not a once-off exercise. It should be done at least annually, or whenever an event has a significant impact on your income and assets.

Debt at retirement

You must pay off all your debt before you retire,  Do not use your retirement savings to repay debt, because this will make it even more difficult to generate the income you need in retirement.

Your expenditure

The biggest threat to your finances is living beyond your means or having to fund a large expense for which you did not provide.

Before you retire, you must establish how much you can afford to spend in retirement. This includes calculating:

* Your current and future after-tax cash inflows (income) and cash outflows (expenses);

* How much you need to save to cover expenses that are likely to increase above the rate of inflation, such as medical costs; and

* What you have in reserve (your assets) and debts (liabilities). Your reserves should include an emergency fund equal to between three and six months’ income.

After you retire, you need to:

* Keep a tight rein on your spending to ensure that you do not exceed your budget. When drawing up a budget, be careful not to understate what you are likely to spend.

* Keep saving. As you age, your living expenses may increase if you have to spend large amounts on health care, while inflation may reduce the buying power of your pension. The way to address this problem is to keep saving.