The Big 5 Retirement Planning Mistakes

by | Jun 4, 2018

There is no doubt about it, the past 4 or so years have been extremely tough for retirees. Constant price increases, higher taxes, higher fuel and food prices and a market that has traded sideways, not offering much in investment performance, has made retirement less of a breeze than what many had hoped for. Poor investment returns mean that retirement saving will not grow by as much as previously expected. The sad reality is that these are problems also faced by those deciding to retire soon. Unfortunately, there is not much any of us can do about the economy nor is there anything we can do about investment mistakes we have made in the past. The best option when nearing retirement or in retirement, is to try and avoid the top 5 mistakes many people make.


1. Not saving enough

This is something younger investors, or those not yet thinking of retirement, should definitely take note of. There are a number of studies out there that show that only 6% of South Africans will be able to retire comfortably, meaning they will be able to earn a post-retirement income of 75% of their last salary. In order to achieve this “replacement ratio” as it is known, is to save approximately 22% of your salary from age 25 until retirement at age 65. Many of us who are saving on a monthly basis know that this – given the current economy in which we are trying to survive – is a pretty difficult task to start from pay check number 1. At least knowing what your goal is from an early age can allow you to make the necessary decisions as you progress through life to ensure you are making adequate provisions for retirement.


2. Not preserving

Did you know that nowadays people will work an average of 7 different jobs before settling down into a career? We see it time and time again, a young investor changes jobs and the first thing they do is to withdraw their pension/provident fund to spend on what, at the moment, seems like an important purchase. Not preserving the tax-free growth and subsequent tax benefits at retirement can be hugely detrimental when it comes to retirement funding capital. It’s extremely difficult as a young investor to grasp the impact of what a few thousand Rands in 2018 can have in 30 years’ time. We can’t stress enough the importance of preserving all retirement saving until you ultimately need it.


3. Not preparing for high medical costs

When trying to project budgets into retirement, not allowing enough for medical expenses can become a costly error. You may feel healthy and strong at age 65 having had no prior serious medical expenses, but unfortunately as age catches up on us, so does the need to have adequate medical funding. Whether this is through a high quality medical aid or having sufficient cash for expenses, precaution needs to be in place to prevent having to dip into retirement capital.


4. Retiring too soon

A mistake many of us don’t want to hear… Typically, your final years of employment are when your salary is at its highest. Delaying your retirement by just a few years, if necessary, can allow for a substantial boost to your retirement savings which could add that little extra level of assurance when projecting retirement income into the future. It can also lead to reducing the number of years you would need to draw an income post retirement.


5. Living beyond your means

Once retired, our first thought is often of all the desires we’ve built up over our working life and what we intend on pursuing now that we have all the time in the world to ourselves. Unfortunately, if insufficient retirement saving is in place, this could lead to drawing too much income too soon, leading to capital depletion. Living annuities allow you draw anything between 2.5% and 17.5%, however, current studies show that 4% is the optimal withdrawal rate that best maximises a person’s retirement funding. That means, to draw R40,000 per month to live off today, you would need to retire with R12 million rand in liquid investments – not a simple task to achieve!