Q: I will be going on pension at the end of this year at the age of 65. I have no debt and my home is paid for.
I have been involved with four different financial advisors, but cannot get away from the exorbitant costs that are involved. I have my pension and a separate retirement annuity (RA) and about R2 million in cash which they all would love to invest for me. I am left with the impression that they could invest my money to earn about 1.5% per annum more than I could, but since their fees will be 1%, it hardly makes it worth my while.
I now seem to think that my best option is to take my R500 000 tax-free allowance from my pension and draw down the minimum of 2.5% on the rest. If I subsidise myself from my cash reserves, I can survive for the first six years of my retirement while still leaving the rest of my pension to grow. I would not even have touched my RA yet.
However I’m still wondering if I would be better off investing the cash amount through a financial advisor?
To answer this question, we need to take a step back. Before you can decide what you want to do with your money, you need to know what you want to do with your retirement.
One person’s retirement dreams are very different from another’s. For some it is to slow down, but for others it is to do the things that your working life never allowed you to do.
At your age a financial plan should support your remaining life plan and lifestyle. Your financial plan is one component of a flexible life plan that will need to see you through from your mid 60s into your late 90s.
Bear in mind that if you manage your investments yourself, you need to set aside the time to monitor your portfolio and be disciplined to adjust to different market conditions. You also have to keep your emotions in check when markets are volatile. These demands and complexities of successful investment management can prove challenging, even for the most informed individual investor.
People everywhere are also living longer. You therefore have to consider the long-term implications of managing risk, your money, tax and liquidity.
In addition, we live in very uncertain times. The IMF has cut South Africa’s 2016 growth forecast to 0.1%, foreign investment in the country has dipped to its lowest in 10 years, a credit downgrade is still on the horizon, and there are still uncertainties around Brexit and Chinese growth, to name only a few. Getting the right financial advice to manage these risks is more important than ever.
A professional advisor will help you set up different investment strategies to achieve certain financial goals and provide assistance and guidance with retirement and estate planning. Competent financial advisors are knowledgeable about financial markets, investing landscapes and tax implications.
At your age there’s much more to consider than saving roughly 0.5% in fees. It is vital to ensure that you’ve planned appropriately so that your flow of retirement income suits your life expectancy, while at the same time taking into consideration factors such as inflation increases and the need to tick off some of the items on your bucket list. Financial planners assist in managing your financial risk to a level of comfort and help making decisions that are in line with your long-term financial objectives.
Bear in mind that the savings you are looking to invest are your hard-earned cash. This represents your reward after many years of working. They can be used to sustain your desired retirement lifestyle on a month-to-month basis, fulfil your dreams of travelling or taking on new hobbies, and be sufficient to take care of those unexpected emergencies. You therefore owe it to yourself to look after this money as best you can.
There are several options available for investing our cash. A financial planner will help you to decide on the most tax-efficient option available, not only from an investing point of view but also when withdrawing. They will also consider different vehicles for different goals, and will also plan for liquidity during your life and on death.
In conclusion, the business relationship with your financial advisor at retirement and during retirement should be one which holistically assesses your needs on a regular basis, taking your personal circumstances into account. This will include assessing your income and capital needs, rebalancing your investments, and guiding you on what is required to take care of your family with as little financial complication as possible upon your passing. The cost benefit analysis to you when you are receiving this type of service has to take all this into consideration, not just a few tenths of a percent.
If you have any questions you would like answered by financial planning experts, please send them to firstname.lastname@example.org.