LIVING LIFE ON YOUR OWN TERMS
The one thing that retirement is not, is an age. Today you have new pension freedoms to decide when and how you retire. But to get there in tip-top financial shape takes some planning.
The coronavirus pandemic turned many financial lives upside down. Millions have seen their income significantly reduced, while balances in individual retirement accounts may have dipped. The pandemic has clearly shown that planning for the unexpected is crucial — and that the need for professional financial planning has never been greater.
As investors continue to face fear and uncertainty about the future, our guide provides helpful tips and information for taking the right steps towards peace of mind – by touching on some of the most common questions about saving for retirement:
- Am I saving enough to retire?
- How do I repair my personal balance sheet?
- Will my assets last through retirement?
- How can I help protect myself from future losses?
- What if I live way longer than my retirement plan provides for?
NO PLAN, NO GAIN
For business-owner, Mike, retirement is something he had not given much-structured thought to. Instead, the 51-year-old has been focused on growing his large foods processing business (located on the outskirts of Abeokuta), while raising his four children with his wife, Sewa.
He had put much of his focus on their offspring getting a sound education in the best Ivy League schools.
While Mike distractedly put aside about NGN50 million in an emergency fund, he had no retirement savings and was paying off two mortgages abroad. Fortunately, his business didn’t suffer too much during the coronavirus restrictions and is growing. While his wife manages the home, he plans on working hard for the next 10 years to put money aside for retirement.
“I’m going to really have to start investing,” says Mike. “Hopefully in the next 10 years, I’ll be able to pay off my house.”
Once you hit your 50s, retirement is no longer something happening far off in the future. Whether you have been a great saver your entire career or are just starting to think about retirement, it’s time to take a serious look at what your golden years could look like. These uncertain economic times can be problematic for retirement savers, but here’s a retirement plan that people like Mike can consider:
Examine expenses vs. income: If you haven’t started saving yet, the first thing to do is to examine your overall expenses, and areas to be trimmed down so that savings can begin. What do you spend money on today (such as university tuition or a mortgage) that you won’t need to in 10 years to 15 years? What do you earn from various sources, and what is your expected future income? Some expenses, such as health care, may be higher later in life, while others, such as commuting or clothing costs, may decline. What you spend will depend on how you live during retirement. If you expect to travel widely, for example, your projected costs might even be higher than they are now, while you’re still working. Once you’ve entered all your information, your calculator should tell you the total cost of your retirement and how much you should save monthly to reach your goal.
Pensions aren’t the only form of retirement income: Retirees-to-be frequently use other assets such as cash Retirement Savings Accounts (RSAs) and rental income to provide for their life in retirement. If you have any other assets, you could use these to fund the first few years of your retirement to give your pension time to recover. The benefit of this would be that you wouldn’t be drawing from your pension pot when the markets are low.
Maintain non-retirement savings accounts: What you have in your pension account will most likely not be enough, therefore, having money outside of your retirement accounts is important. First, have an emergency fund (usually, three months to six months of expenses that is easily accessible). Consider maintaining a sound mix of stocks, bonds, mutual funds, Exchange Traded Funds (ETFs), and other assets that fit your risk tolerance, investment time horizon and liquidity needs. It can be tempting to shy away from stocks to reduce risk, but the growth that stocks may provide is still important at this stage of your life.
Watch your asset allocations: You will want to make sure your retirement portfolio keeps pace with inflation, which in current times, means staying in the middle-of-the-road in a moderate-risk portfolio. The standard 60-40 portfolio means 60% is invested in equities and 40% in fixed income, and it could still work, with tweaks.
Downsize debt: Debt is a big issue for many in their 50s. Credit card debts need to be put under control. Any vehicle debts such as a lease, which is an ongoing cost, also requires watching. Consider accelerating mortgage payments.
Make provision for medical expenses: Health-related expenses tend to be high as one ages. Ensure you have an adequate health insurance cover to live without worrying about unplanned, hefty medical bills.
Plan where you will live: Where you retire could have a big impact on your expenses. For example, you may also consider staying in your town or city, but moving to a smaller home that is more financially manageable. On the other hand, you might choose to live in an area with high living costs just so that you can be near grandchildren – a move that could require you to economise.
And if you outlive ‘expected life’? Every financial plan is based on certain assumptions. A basic assumption for a retirement portfolio is ‘life expectancy’ where you assume to live up to a certain age. What if you outlive that age? Unpreparedness for longevity can be a huge financial threat. This is where annuities come in. They provide payouts for a lifetime, and can also be put in place for your spouse after you pass on.
Keep updating: The above steps explain the basics of creating a retirement plan, but it’s not something you do once and never look at again. Chances are, your goals for retirement will vary as you age, or whenever you experience a major change to your finances, such as a household death, or welcoming a new family member. You might be able to save more in some years than others. Your investments will perform differently at different times. All of this requires you to update your retirement plan periodically.
CONCLUSION: RETIRE WELL
The year 2020 doesn’t have to be the one where you gave up on your retirement dreams. Make the right moves now and it might be the year you actually secure your ambitions. A financial plan can keep you focused on your long-term goals so that every short-term hiccup doesn’t distract you from your destination. It’s the only way you can face uncertain times with confidence.