Managing your money after retirement

Johan Gouws, from Momentum Employee Benefits.

Upon retirement your ability to actively earn an income diminishes drastically – very often making a pension pay-out the lifeline for future financial needs. Retirement assets become the sole source of income for retirees and therefore need to be carefully managed to ensure that they sustain you for the remainder of your life.

Retirees face a number of risks in retirement, such as outliving their retirement income (longevity risk), the rising costs of goods and services, credit risk and asset/liability mismatching. These risks can be challenging and further emphasise the need for effective financial management in retirement.

It is very important for you to have a holistic picture of all your investments prior to retirement and to have a proper plan in place to match future expenses with the appropriate assets. “It is always best to seek the assistance of a financial adviser when putting this plan in place,” says Johan Gouws, head of Investments at Momentum Employee Benefits. “This plan needs to be customised to your specific situation, and must include a projection of your future income and expenses, allowing for the effects of inflation.”

Upon retirement your accumulated retirement benefit will accrue. Depending on the fund rules, your savings may stay in the fund and you will receive an in-fund pension, or you may be forced to purchase outside the fund.

Given that a pension pay-out is usually the primary source of income, a reasonably conservative investment strategy should be followed and high risk investments avoided. “Retirees should investigate the merits of securing an annuity with a growth element to cover their basic expenses,” says Gouws. “The balance of the pension fund can be invested in a living annuity using a balanced portfolio as the underlying investment.”

Pension funds allow a third of the benefit to be withdrawn as a lump sum, while provident funds allow the full benefit to be taken as a lump sum, although legislation seeks to change this. “Lump sum benefits should be invested according to the retiree’s personal circumstances,” says Gouws. “First priority should be to pay off any outstanding debts. Thereafter money should be put aside for a contingency fund, unexpected capital expenses (i.e. car repairs) and large planned expenses.”

“It is important to ensure that the type of assets match the nature and term of the expenses they are covering. For example, an emergency fund should be in a money market investment, while a travel fund should be in dollar based offshore investments.”

“Always try to diversify your assets through different instruments, insurers and geographical areas (local/offshore). One can mitigate their risks further by deciding which risks they are prepared to take and which risks they would rather insure themselves against. For example, if you expect to enjoy a long retirement, then it is advisable to purchase a guaranteed annuity product rather than a living annuity product,” says Gouws.

“By having a customised financial plan in place and actively managing these retirement risks, one can enjoy smooth financial sailing in retirement,” concludes Gouws.