NATIONAL NEWS - How do you know if you will be financially secure when you retire? People tend to be overly pessimistic about retirement.
Perhaps this is because we feel the need to hold on to our savings with a vice-like grip, afraid to invest it in anything riskier than a money market portfolio, for fear of it disappearing into the unknown of the financial markets in our twilight years.
Therefore, we would rather take a glass-half-full approach to our savings than attempt to understand the opportunities and risks associated with investing in the markets, says Andrea Bezuidenhout, advice partner at The Wealth Corporation.
To be retirement-ready, in addition to your investments, you need to consider three things.
This is the area of our finances where we have the most control. People tend to assume that their monthly living expenses will decrease in retirement. While this may be the case over time, you need to consider the expenses that are likely to increase, such as medical aid. You may also find yourself wanting to travel more.
Distinguish between your needs and your nice-to-haves.
Forget about keeping up with the Joneses, in retirement it's all about keeping up with inflation.
For this reason, you should not keep the majority of your retirement savings in money market accounts and the like, as these cannot keep up with the erosive effect of inflation over time. The best way to beat inflation is to hold a decent portion of your investments in equities, which have a greater chance of providing you with the necessary returns in the long-term. With retirement sometimes lasting as long as your working career, you need to take a long-term view.
By this, we refer to the amount of tax paid on your total income. While you will be required to pay taxes in retirement, certain concessions in terms of tax thresholds exist.
And as you will likely be earning less in retirement than when you were at the peak of your career, you will be in a lower marginal tax bracket than previously.
In addition, while you were working, you were earning an income from one or two sources that are fully taxable at source according to the income tax provisions. However, in retirement, your income needs could be constructed from varying investment vehicles with differing tax applications, thereby lowering your effective tax rate substantially, giving you more disposable income on a monthly basis.
Investment returns have a significant effect on your retirement capital, but often this is viewed in isolation. It is important to remember that in effect, investment returns are one variable which, along with your living expenses, tax rate and inflation ultimately affects the longevity of your retirement capital.
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