Threats to a secure retirement

Many investors believe the most ominous threats to retirement savings are unpredictable market forces and failing economies, but life circumstances and lifestyle choices play a much greater role.

The most bullet-proof retirement plan can be disrupted by relationship breakdowns or the choice of an extravagant purchase. Investors should be aware of these more personal choices that can blind-side retirement dreams.

1. Divorce

Irrespective of a couple’s wealth, a divorce can have catastrophic effects on retirement planning. It disrupts financial independence and can impact lifestyle choices. A jointly conceived retirement plan of a single retirement home, appropriately timed vehicle upgrades and a retirement income sufficient to support a combined lifestyle would need to be recalculated for each individual.

There is also less time leading up to retirement in which to make up for any retirement shortfall after the estate has been divided.

Research shows that most couples that are divorced have been married for between five and nine years. The average age of divorce was 43 for men and about 40 for women. Most people whose marriages ended in divorce had children under the age of 18, making it difficult to put away extra money for retirement while also running a single-income household.

On separating, a couple also tends to double-up on expenses such as rental or a home loan, rates, water, electricity, landline and non-consumables.

It’s also important to assess the assets each will acquire in the divorce settlement. Even if the asset split is deemed to be equal in value, one partner could be left with illiquid assets that may cause cash flow problems. For instance, one spouse keeps the retirement annuity (RA) valued at R 1 million, and the other is awarded money market funds of R1 million. The funds in the RA cannot be accessed until age 55, while the money market funds can be used at any time.

There will also be different tax and CGT implications attached to different types of assets that can affect their net value. This is why it’s important to seek professional financial advice before agreeing on asset split.

You also have to consider the legal costs. A contested divorce can cost between R10 000 and R500 000. Divorce legal fees add up quickly and can erode the net value of each partner’s estate.

2. A second home (holiday home)

In many cases the joy of a second home is quickly replaced by anxiety once the reality of funding it sets in. The upkeep can be arduous and expensive.

Also bear in mind that if the holiday house was purchased after October 2001, you would be liable to pay Capital Gains Tax (CGT) when you eventually decide to sell it. Factor in CGT, agent’s commission and other related costs when calculating the proceeds of the second property into your retirement plan.

3. Starting a business

Retired executives with an entrepreneurial itch often find the temptation to start a business irresistible, but doing so can dig dangerously into much-needed retirement capital. As enticing as it is to dabble in a new business venture, few earn what they would have earned if they’d kept their funds invested. It’s wiser to channel entrepreneurial energies elsewhere rather than withdrawing your lifetime assets in the hopes of satisfying an entrepreneurial whim.

Baby boomers are ‘re-wiring’ after retiring by moving into the consultancy space, purchasing a franchise, starting a small business or investing in property to build a rental property portfolio.

Cash flow is one of the biggest threats to any new business and the temptation to dip into retirement savings can be great, but your retirement capital should be ring-fenced and kept for what it is needed for – securing a comfortable retirement.

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