Investors often find it difficult to plan for retirement during their early working lives, arguing that they will take care of it later and make up the shortfall when they earn a bigger salary.
Unfortunately, this means that retirement planning is regularly neglected until only a few years before people make the leap. In this column, Lynette Wilkinson, financial planner at Chartered Wealth Solutions, answers four questions about investing in your fifties.
1. What are the most common mistakes associated with managing money and investments in your fifties?
As people get older they often assume that they must rebalance their portfolios and move into more conservative investment instruments. A number of pension funds and retirement annuities automatically change the underlying portfolios of their members to more conservative investments as time goes on with members having significant exposure to cash immediately prior to retirement. This is not necessarily the best option – investments still have to outperform inflation in retirement. It is really important to construct portfolios that will be able to meet the targeted return before and after retirement.
It is also imperative to be debt free by retirement. Investors don’t want to be in a position where they have to settle their mortgage or other debt with retirement capital.
2. If you have dependents and a considerable debt burden it is important to have adequate life insurance cover, but as people get older they may have fewer dependents and less debt. Do you still need life insurance in this phase of your life?
It really depends on the individual’s circumstances. Investors have to review the monthly premium as well as the overall insurance cover on a regular basis. Over the years the cost of cover has reduced. It is important to ensure that you only pay for what you need and that your policy is still in line with your current needs.
For most people the need for life insurance will reduce as their children become independent, their assets grow and their debt burden shrinks, but it is important to ensure that if something was to happen to you, your estate will have sufficient liquidity (enough cash and liquid assets) to pay all the related taxes (typically capital gains tax and estate duty) before you cancel your policies.
A lot of South Africans also take financial responsibility for their parents. It is vital to ensure that if something happens to you they will still be taken care of.
3. Traditionally people have tended to retire at 60 or 65, but research suggests people live longer and often reach this age without nearly having made enough provision for retirement. Do people need to change the way they think about retirement?
I think so. I don’t believe people should retire from work, but rather retire with their sights on a new goal. A lot of people start a second career or engage in other activities that still provide them with an income. They have a lifetime’s worth of experience they can apply. For me the idea of retirement is not about not working, but rather to do something you really like doing and choose to do. That way you don’t go to work simply because you have to. Often people still make a lot of money in retirement. They can reduce their working hours and gradually move towards retirement instead of suddenly being in a position where they have nothing to do.
4. If you have less than ten years to your retirement date, there may be a risk of investing too conservatively (not enough exposure to growth assets like shares and listed property) or, because you did not save enough, the temptation to invest in very risky investment schemes. How do you avoid these pitfalls?
It is very important to have a financial plan that clearly sets out your objectives. You need to know what your retirement goals are. How much income do you need? Will you need to buy a new car or fund a holiday? This will give you an accurate indication of how your assets have to be invested to cover these expenses.
There is no point in making investments if you don’t have an idea of how this will allow you to achieve your goals and what returns you require to facilitate a comfortable retirement. I often see clients who draw much less income than their capital allows. They don’t have any idea of the amount of money they can safely draw to enjoy their retirement without eroding their capital base.