A well-planned retirement isn’t just about savings – it’s about balancing life expectancy, spending needs, and diverse income streams for long-term financial security.
When people ask, “How much do I need to retire?” it’s tempting to look for a simple answer. Rules of thumb, like saving 25 times your expenses or following the 4% withdrawal rule, provide a helpful starting point.
Here are 3 critical questions you should ask yourself:
1.How long will I live?
Estimating your life expectancy is a critical element of retirement planning. While it’s impossible to predict with certainty, you can make an informed guess:
- Family history: If your relatives lived into their 90s, you may plan for a longer lifespan. Conversely, chronic illnesses or health risks could indicate a shorter lifespan.
- Lifestyle choices: Healthy habits, such as exercise, a balanced diet, and stress management, significantly influence longevity.
Why it matters: Underestimating your longevity could mean running out of money.
For example, if you retire at 65 and live to 95, your portfolio needs to last 30 years or more.
2. How much will I spend each year?
Your future expenses will shape your income needs. While some costs, like commuting, may decrease in retirement, others – such as healthcare or leisure – often increase.
Key categories to consider:
- Housing: Staying in your current home keeps costs stable, but downsizing or purchasing a second home could significantly alter expenses.
- Healthcare: Many people assume they can reduce their medical plan costs in retirement. In reality, medical claims only increase, and medical inflation is typically 3% higher than standard inflation. Typically these spike in your 80s and 90s.
- Leisure: With more free time, spending on travel, dining, and hobbies often increases. Be realistic about these discretionary expenses.
Analysing your current spending and projecting retirement-specific changes will help you understand how much income you’ll need.
3.What income sources will I have beyond savings?
Rules like “save R10 million” often overlook other income streams that can supplement savings and reduce reliance on withdrawals:
- Group benefits and other policies: Many employees participate in group benefit schemes with pension funds. These may allow you to purchase an annuity for life or be part of a defined benefit scheme, providing steady income in retirement.
- Property rental units: Rental income from a portfolio of properties can supplement retirement needs but is taxed at your marginal rate.
- Home equity: Downsizing your home can unlock home value for additional income. However, these options require careful consideration.
- Part-time work: Even generating a small income can make a significant impact. For example, earning R120 000 per year could reduce your optimal portfolio requirement by as much as R2.4 million (using the 5% rule).
Combining these income streams with your savings creates a more resilient plan, reducing reliance on market performance for income.
Flexibility is the true key
Retirement planning isn’t static – it requires ongoing adjustments. Life is unpredictable, and plans must adapt to changing circumstances:
- Retirement is no longer a 15-year life phase – it’s a 30-year journey.
- The first decade of retirement often doesn’t go as planned.
- Retirement cash flow planning has become an ongoing process.
Be cautious about making irreversible financial decisions early on in retirement. You face some big decisions – many of which you only get to make once – so take the time to carefully consider all options and stay as adaptable as possible.
Retirement planning is more than just numbers – it’s about your life. How much you need depends on your longevity, lifestyle, income sources, and your ability to adapt over time.
Instead of relying solely on general rules, ask yourself these deeply personal questions. This serves as a starting point for solving the puzzle of your optimal retirement.
Adapted article by Matthew Matthee – Graviton Wealth Management