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As you approach retirement- the third phase of your life after childhood and your working years – planning for financial security becomes crucial,

especially to protect the wealth you’ve built and to maintain your lifestyle for the rest of your life. Offering his advice, Citadel Director and Regional Head: Western Cape, John Kennedy, emphasises the importance of strategic financial management in retirement, especially considering that this phase can be further divided into three distinct periods, each requiring different financial approaches.

A poll published on Citadel’s LinkedIn page revealed that 68% of the participants saw sustainable income streams as a priority, ahead of preserving wealth at 19%, leaving a legacy at 10% and philanthropic endeavours at 3%. The same poll on X revealed similar results with 66.5% of participants prioritising a sustainable income stream, while 11% prioritised preserving wealth, 16.8% leaving a legacy, and 5.8% selected philanthropic endeavours.

Understanding the three phases of retirement

Retirement can be segmented into three phases: the active phase, the passive phase, and the supported phase. Each phase presents unique financial needs and challenges.

  1. Active phase: In the early years of retirement, many people remain active, engaging in travel, hobbies, and other leisure activities. This period is characterised by higher discretionary spending as retirees fulfil their bucket list dreams.
  2. Passive phase: As retirees enter their 70s to 80s, their lifestyles often become more subdued. Travel and large-scale activities may decrease, your lifestyle may become more frugal, and you may look to ‘right-size’ your living arrangements.
  3. Supported phase: The final phase involves increased health care and support needs. Expenses shift significantly towards medical care and assisted living.

Key financial risks in retirement

Those who are newly retired or approaching retirement can benefit from looking at three key risks and making plans to mitigate them to maintain a good, steady standard of living.

  1. Longevity risk: With people living longer, there is a real danger of outliving your savings. Planning for at least 30 years post-retirement is essential. That means if you retire at 65, plan to live until you are 95.
  2. Inflation risk: Inflation erodes purchasing power over time. What costs R100 today might cost significantly more in the future, impacting your standard of living. It’s therefore wise to get professional advice on how to ride out inflation safely in the future through sensible and suitable investments that have a track record of delivering inflation beating growth.
  3. Medical risk: Healthcare costs typically rise faster than general inflation, demanding a larger portion of your budget as you age. It’s important to set aside funds for future medical needs including enough to cover rising medical aid costs as you get older.

Strategies for financial planning

To navigate these phases and risks, strategic planning is vital. Here are some expert tips:

  1. Take a balanced investment approach: Your investment strategy should evolve with your age. In the early years, a high proportion of your investment strategy should comprise of growth-oriented investments. As you age, shifting a portion of your investments to shorter duration and more conservative asset classes should help to protect your assets from market volatility. That said, don’t be too risk-averse with your investment strategy, otherwise your money may not keep growing at the rate required to sustain your needs. To manage inflation and ensure long-term sustainability, maintain a portion of your portfolio in growth assets, like equities. These investments help counteract the effects of inflation but should be balanced with stable assets like bonds and cash to manage volatility.
  2. Budget for each phase: Map out your expected expenses for each phase of retirement. Consider your current lifestyle and how it might change. For instance, budget for travel and leisure in the active phase, and allocate more for medical expenses in the supported phase
    Do this simple savings calculation: If you plan to retire at 65 and want to maintain the lifestyle you have become accustomed to when you had an income of R100,000 per month, you might need 200 to 250 times that amount in savings, totalling around R20 to R25 million to sustain your needs until the age of 95.
  3. Minimise your debt: Enter retirement with as little to no debt as possible. It’s advisable to have all your major expenses, including house and car, paid off by the time you retire.
    Implement a withdrawal strategy: An essential aspect of retirement planning is determining a sustainable withdrawal rate from your savings. The ideal drawdown rate is about 4.5 to 5% annually, retirement and age dependent. This rate should be adjusted based on inflation and your specific, changing financial needs.

Conclusion: Avoid quick fixes

When planning for your long-term financial stability, there is real value in consulting with professional financial advisors, who can personalise strategies based on your unique circumstances, accurately calculate the quantum you need to live the life you want, and to ensure your retirement plan is robust, risk-managed and adaptable. Advisors can also help you consider additional goals, such as funding your grandchildren’s education or fulfilling your philanthropic dreams.

Lastly, beware of schemes that promise unrealistic returns. Many retirees fall victim to scams and unscrupulous ‘product pedlars’, resulting in significant financial losses. A disciplined, well-thought-out plan is far more reliable than seeking quick fixes. Any investment scheme that seems too good to be true most likely is. Planning for financial security in retirement involves discipline, understanding the different phases, managing key risks, and keeping the overall strategy simple and understandable – all of which can help you create a plan that can help ensure a comfortable, secure and fulfilling retirement.

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