Risks facing retirees in the COVID-19 era
The worldwide Covid-19 pandemic has cast a spotlight on the risks facing those about to retire or already retired. But no matter the economic environment, preparing for one’s best possible retirement takes careful planning and consideration of the available retirement options as well as the risks of each.
There are three main risks facing retirees:
Outliving your retirement savings
Having your spouse or dependents not taken care of when you die
Your income does not increase as fast as your expenses
To deal with these risks, it is of no use worrying about things you cannot control or influence. One needs to focus on things within your control. To effectively manage these risks, you need to manage your expenses within your budget; choose the best type of annuity for your needs; and get good advice.
Managing your expenses within your budget
What can you do to prepare and take control of your retirement? We believe there are five simple steps that can be followed to make sure you understand your expenses and thus your income needs. You can take control by:
Understanding your situation so that you know where you spend your money and know what resources you have. Make lists.
Reviewing your expenses in detail to find out which expenses can be reduced, delayed or stopped.
Planning. Work out how long you will be able to pay your bills, by calculating your total household income, savings and other possible sources of income. Work out how much you will need going forward each month. Also spend some time thinking about which expenses may increase, for example medical expenses.
Being proactive: Once you understand your financial position, you can start planning for when and how you will reduce, delay or stop any non-essential expenses. Also, consider taking other necessary actions to ensure that your money stretches as far as possible and for as long as possible.
Starting a good habit. Now that you have a budget and a plan, stay on top of your finances by recording your expenses, compare your expenses to your budget every time you spend money and check your plan every month and adjust it if needed. By starting a good habit, you’ll be using this opportunity to put yourself in a better position to achieve what matters most to you.
Choosing the best type of annuity (pension income) for your needs
There are two broad categories of annuity types – a “guaranteed”, or life annuity is the first type, and a “flexible” or living annuity. Each has its benefits and drawbacks, plus a host of options within each broad category. More recently there are hybrid options that combine the best features of each.
In terms of guaranteed pension options, the decisions which need to be made are:
Future pension increases – these can be level which pays the same income for the rest of your life (generally not advised as inflation erodes this value over time), or a fixed increase pension pays a lower starting income and increases each year at a fixed percentage chosen. There is also an inflation-linked pension is guaranteed to keep up with inflation up to certain limits and a with-profit pension has increases linked to investment performance in an underlying reference portfolio.
Including a spouse’s pension
Including a minimum period for which payment will continue regardless of death
These decisions affect the level of income at the start. A higher starting income is not always better as it may set you up for low or no increases and severe financial hardship later.
On the other hand, a flexible pension is not guaranteed to last for life, and how long your money (or rather level of income) will last depends on how much income you take, as well as the growth of your underlying investments. The law allows you to draw a pension of between 2.5% to 17.5% of your money per year and a financial adviser can help you manage your investments and decide how much you can afford to take each month.
Get good advice
The value of good advice cannot be underestimated. Especially at an important and often irreversible decision point like retirement. It helps you decide which goals and needs to prioritise while understanding your options and the costs and benefits of each. This means you are fully informed to choose the option that best meets your needs. A good adviser will help you make decisions in time to receive your pension when you need it and help you with your ongoing decisions if you choose a flexible pension or more complex pension option.
With large financial decisions to be made, there are many benefits to playing an active role in your retirement journey. You are not a passenger on the journey, but the driver.