Extreme market volatility and uncertainty has raised alarm bells for people with retirement savings – and it’s best to be prepared for another possible disruption, says Tanita Conradie, Certified Financial Planner at Brenthurst Wealth Management in Pretoria .
Conradie said global factors affecting the economy, such as Russia’s invasion of Ukraine and the Covid-19 pandemic, are extreme examples of risks affecting pensioners – with little that can be done to stop them. .
She noted, however, that the risks posed to South African pensioners are different and there are ways to mitigate them. Risks include:
With advances in medicine and biotechnology that fight disease and allow us to live longer, there is now a need for retirees to be able to sustain their savings for longer, Conradie said.
She said it is now possible that you can outlive your savings.
“This is a significant challenge if your retirement assumptions haven’t factored in a revised retirement age and life expectancy.”
According to the World Bank, the average life expectancy in South Africa has risen from under 49 in 1960 to 64 in 2019. CNBC also reports that longevity is the biggest financial risk we face.
To combat this, you can choose a life annuity instead of a life annuity when you retire.
“The former is a smart option if you’re worried about outliving your retirement savings, because a life annuity gives you guaranteed monthly income for life,” Conradie said.
The life annuity, however, has some drawbacks, including the fact that your heirs won’t receive a lump sum if you die earlier than expected, she added.
Conradie suggests future retirees consider this option, but invest most of their savings in the life annuity, with some in alternative instruments to provide them with liquidity.
Planned and unplanned expenses
While we’d like to believe that life gets easier in retirement, the reality is that life’s obstacles and speed bumps don’t just go away. As such, unforeseen expenses for emergencies need to be anticipated and taken care of, along with the unavoidable costs associated with healthcare and elder care, Conradie said.
“You can avoid unnecessary financial stress by maintaining an emergency savings fund for unforeseen emergencies.”
She added that the best protection against the possibility of serious health problems is to take out a risk policy, ideally in one’s younger years, to cover serious illnesses for the duration of one’s life.
Another form of protection one could consider is medical aid gap coverage, which helps pay for medical costs not covered by your health insurance plan, she said.
Circumstances may arise when you have to make sacrifices to help a loved one during a crisis.
Conradie said the best way to prepare for such occasions is to have risk and life insurance for you and your family, as well as an estate plan that helps remove many uncertainties.
One of the most important steps is to write a will so that your family’s future is not determined by third parties and rules such as dictated by intestacy law, Conradie said.
“Without a valid will, all assets in your estate are frozen and the liquidation of your estate could take months to finalize, leaving your family financially stranded. To avoid this, it is sufficient to draw up a legal will.
In the same way that life expectancy increases, we also know that markets will continue to rise and fall over time. If you’re retired or about to retire, time is the only luxury you don’t really have and therefore you’re at greater risk if the market goes down.
Retiring during a bear market is less than ideal, especially if your portfolio is heavily weighted in listed stocks or other asset classes that are currently under pressure, Comradie said.
“You can reduce your risk to some degree by getting unbiased advice from a financial adviser on the best course of action.”
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