In times of economic turmoil, be it international crises or domestic policy affecting how the markets fluctuate, many believe the only threats to their pensions are unpredictable ones.
Yet, lifestyle choices and circumstances can disrupt even the most bulletproof of retirement plans. An extravagant purchase more than is necessary or a last-minute emergency, Director at Crue Invest Craig Torr, says personal and softer incidents can often blindside soon-to-be pensioners.
Torr explains there are 3 simple considerations to be made when trying to minimize the effect of unplanned circumstances.
A second home (holiday home)
The thrill of owning a second home is often replaced by anxiety once the reality of funding a second home from a reduced retirement income sets in. The upkeep of the second property can become an arduous duty rather than one of retirement’s anticipated pleasures.
If the equity in the second home is needed to supplement other retirement investments, the timing of the sale of a second home can be instrumental to secure retirement cashflow. Being forced to sell a second property at an inopportune time can result in your nest egg being compromised. If the holiday house was purchased after October 2001, you would be liable to pay Capital Gains Tax (CGT). Factor CGT, agent’s commission and other related costs when calculating the proceeds of the second property into your retirement plan.
Health, age and affordability are obvious factors when choosing a retirement home. Proximity to medical facilities, family and broader support system are also important. The cost of maintenance as you age, personal security and the need for assisted living should be considered when deciding to stay in one’s own home during retirement.
Aside from remaining in your own home, the main purchase options available to retirees include Sectional Title, Share Block Schemes and Life Rights, and it is imperative to consider the financial implications of each transaction when putting a financial plan together. Affordability, lifestyle goals and retirement income all contribute to making the decision.
Before committing to any of these purchase schemes, our advice is to compare a number of developments in terms of the services, facilities and costs. Ensure that you understand exactly what services and facilities you are buying, and what additional levies and costs you will liable for in the future.
Starting a business
Retired executives with an entrepreneurial itch often find the temptation to start a business irresistible, but doing so can dig dangerously into much-needed retirement capital. As enticing as it may be to dabble in an exciting new business venture or try one’s hand at innovation, the truth is that very few earn what they would have earned if they’d simply kept their funds invested. It would be wiser to consider alternative outlets to channel entrepreneurial energies rather than disinvesting lifetime assets in the hopes of satisfying an entrepreneurial whim. Baby boomers are ‘re-wiring’ after retiring by moving into the consultancy space, purchasing a franchise, starting a small business or investing in property to build a rental property portfolio.
Despite the wide benefits of contributing in retirement, we advise that you do not access your retirement capital to fund your business start-up. The capital needed to fund one’s retirement, allowing for an extended life expectancy, inflationary increases and increased medical expenses (which generally outstrip inflation by around 4%), should be ring-fenced and secured. One of the biggest threats to any new business is not having sufficient capital to carry on when the new business faces a snare, and the temptation to dip into retirement capital can be great, but should be avoided at all costs.
Funds ear-marked for a business venture should be invested in a strategy that is commensurate with your investment horizon. If you are planning to retire within the next five years, it would be unwise to invest in a high risk strategy as this could result in you not having sufficient funds available when needed as a result of short-term market fluctuations. These funds should specifically be earmarked for your business venture, and should be supported by a sound business plan.
Giving away too much, too soon
One of the greatest joys of financial freedom is the ability to pursue philanthropic pleasures. But there is a danger of over-estimating how much one can be given away leaving a shortfall in your retirement capital.
Careful planning with a financial planner who has an in-depth understanding of South Africa’s Donations Tax legislation is essential before making any decisions to give away assets while still alive. A financial planner needs to ensure that your retirement plan is resilient enough to withstand the donation, leaving room for variation in the underlying assumptions used when developing the plan, such as life expectancy, inflationary increases, medical costs and large unforeseen expenses. Our advice is to err on the side of caution and work your legacy into your Last Will and Testament rather than seek to give too much too soon.