Retirement Income: How To Avoid Running Out Of Money

The fear of running out of money in retirement is common amongst retirees and people who are near the end of their working life. It is a valid concern, according to the Sanlam Benchmark Survey, only 6% of South Africans will be financially independent when they retire. For the remaining 94% to be equally prepared, planning is important to achieve the simple goal of having enough retirement savings to last you throughout your retirement years.

Over the years, we have met many clients who complain about unsuitable retirement planning advice. When a client complains, it is usually for a good reason or genuine concern. They usually received inappropriate retirement planning advice that did not meet their expectations – or were sold an inappropriate product or maybe a combination of the two. The challenge is that many retirees need money for emergencies or an extra income but are unable to access their retirement savings post retirement. This is because you cannot change the terms of your transaction after implementing a post-retirement product without restrictions. You need to think carefully about your choices and implications of your decision before you retire.

Retirement lessons we can all learn from Mr. Khumalo:

Mr. Khumalo is 64 years old; he plans to retire from the Department of Health in 2019. His pension fund is currently worth R3 000 000 and he also has personal savings of R50 000. When he retires from a pension fund in 2019, he is allowed to take one-third of his retirement capital in cash. With the rest of the money, he must to buy an annuity. Annuities are a type of investment account used to generate regular income payments in retirement. He has decided to buy a living annuity because he wants flexibility to review and change his income payments every year.

Making sense of his tax situation

The first R500 000 of his one-third retirement benefit is taxed at 0%. The balance of his retirement benefit is taxed according to the retirement tax table. His contributions made to the Government Employees Pension Fund before 1 March 1998 are tax-free and will increase his tax-free lump sum benefit. It is important to remember that the Government does not just take tax – it also gives him a number of generous allowances for saving tax. He can take advantage of these allowances with tax planning.

What can lead to him running out of money?

Mr. Khumalo retires and takes a tax-free lump sum of R500 000 and transfers the balance R2 500 000 into a living annuity. He draws an income of 5% a year, which is R10 416 a month (R2 500,000 x 5%/ 12). He then uses his tax-free lump sum of R500 000 to renovate his house, payoff debt and buy a new car. A year later, he needs money to pay for her daughter’s university registration; however, his monthly income of R10 416 is not enough to pay for the registration fee. He is frustrated because he cannot withdraw additional money from his living annuity besides the monthly income. In addition, the opportunity to change his income level is only in available in August of the same year. That means he has to find other ways to pay for his daughters university registration. This story is all too familiar to most people who retired without the assistance of a qualified financial adviser.

Planning is important

There are many factors to consider before you choose what to do with your retirement fund. It is a very special time and the decisions you make now can make all the difference to the lifestyle you want. The primary objective in post-retirement planning is the provision of sufficient capital. Retirement choices can be complicated and your personal circumstances change. It makes sense to talk to a wealth manager regularly, before and after your retirement. You do not have to do it alone. We are here to help.