Money mistakes to avoid during retirement

The 10X Investments Retirement Reality report 2023/2024 (which you can download below) makes for uncomfortable reading: with only 6% of South Africans on track to retire comfortably, you need to make sure you’ve thought of everything that might impact your retirement planning. Which begs the question: how do you avoid the common financial mistakes people make when they retire? We asked Senior Retirement Consultant Andre Tuck, who has spoken with thousands (literally!) of people about their retirement plans over the course of his career at 10X, about the most common areas for concern. 

Choosing the wrong pension product: Living Annuity vs Life Annuity

When you retire you are obliged by law to use at least two-thirds of your retirement savings to buy an annuity, which will pay you an income in retirement i.e. a pension. You can choose between two types of annuity: a guaranteed (also known as a life annuity) or a living annuity. 

With a life annuity, the insurer pays you a specified monthly pension for the rest of your life. Choosing a life annuity insures you against longevity risk (the risk that you outlive your savings) as well as investment risk (depleting your capital too soon due to inadequate investment returns).  

You do not, however, have any control over how your money is invested, nor have any flexibility to draw a lower or higher income when your expenses change. Also, your policy dies with you, and no money passes to your heirs. 

A living annuity transfers the risk and responsibility for securing an adequate income for life to you. In return, you have greater investment and income flexibility, and your heirs inherit whatever is left of your capital after your death. 

Choosing between a living and a life annuity at retirement requires a careful evaluation of your personal needs and circumstances. This is a critical decision – with income, tax, estate planning and risk implications – so you should consider your options carefully before committing.

Underestimating your expenses

Your financial situation is likely to change during retirement and it is key to keep your budget up to date so that you can respond confidently to sudden expenses or opportunities. A vague plan based on the assumption that you’ll be spending less money in retirement simply isn’t good enough.  

The 2021 Brand Atlas Survey, which tracks the lifestyles of the 15 million economically active South Africans (those living in households with a monthly income of more than R8,000), found that just 7% of savers have full confidence in their plan. This confirms that vague ideas aren’t enough: you need a plan that’s workable, realistic and up-to-date. The same goes for your budget. A guesstimate won’t help much – you need to get into the details. 

While expenses such as travelling for work or bond repayments will likely fade away when you retire, your spending will probably increase in other areas, such as medical expenses. Healthcare is an important area to consider when planning your retirement budget. According to Statistics SA, most causes of death in South Africa are attributed to non-communicable diseases, such as stroke or heart disease, manifesting mostly in older people. If you don’t provide sufficiently for healthcare, your retirement could become a costly and stressful exercise in paying off medical bills.  

Another factor to consider is that as a retiree you might find yourself looking for ways to fill your time. The cost of hobbies – such as travel, eating out, sports and other entertainment – can really add up. Create a detailed and realistic budget to help you to manage your money, instead of allowing it to control you. 

Drawing down too much 

Brand Atlas found that 79% of those who do have a retirement savings plan (up from 75% the year before) are unsure they will have enough money to maintain their lifestyle in retirement.  

Retirees who have selected a living annuity, rather than a life annuity, get to have some control over their money in retirement, as well as leave an inheritance. That flexibility comes with the responsibility to calculate a sustainable drawdown to ensure they avoid outliving their savings.  

When calculating how much money you can draw each year you need to consider your time horizon, your asset mix and the fees you pay. The conventional approach is to set your desired income upfront by using the “4% rule”. This rule refers to a constant, non-volatile spending plan, which outlines that investors can safely spend 4% of their initial capital, growing annually with inflation, for 30 years, independent of stock, bond and inflation gyrations, assuming a 60%-40% mix of stocks and bonds. This model would not hold up for a more conservative asset mix.  

There are other ways to apportion your savings. It is important to do your research and consult with your fund provider or financial advisor about choosing the approach that is best for you. Financial planning tools, such as the 10X Living Annuity Calculator can help you find your optimal sustainable draw-down rate, based on your estimated life expectancy and other parameters. 

Paying high fees

While most retirees know that their drawdown rate is an important lever to ensure their savings last, few retirees realise that the fees on their living annuity are likely to be their single biggest expense in retirement. The Retirement Reality Report found that 50% of retirement savers don’t know what they are losing to costs or say there are no fees at all (which is obviously very wrong). 

To illustrate the cost of high fees, assuming a drawdown of 5% from a R4,8 million pension pot, a retiree would receive a pre-tax income of R240,000, or R20,000 per month. At the industry’s average fee of almost 3% pa (typically made up of advice, administration and investment management fees) they would be paying costs of around R144,000 pa (R12,000 per month), meaning they are paying themselves only two-thirds more than the service providers. Or, from another perspective, almost 40% of their drawdown is spent on fees.  

Retirees who are unsure about the fees they are paying should ask 10X Investments for a free, no-obligation cost comparison.  

Panic selling when the market is down 

Investing in growth assets has proven to be the best way to increase your wealth. Inevitable periods of market volatility may, however, test your nerve. You might feel the urge to panic and change your asset mix when you see a sudden sharp drop in the value of your portfolio. But giving in to your emotions and switching when the market is down will likely lock in your losses and leave you with the prospect of a permanently lower income thereafter.  

Based on global life expectancy figures (as reported by the World Health Organisation in 2020), individuals who retire at 60 are likely to live another 15 years or more, which means they have time on their hands to ride out bouts of market weakness and recover any losses. The trick is to keep your eyes fixed on your long-term horizon and not react to short -term market events. 

It is important that retirees manage their retirement savings in a way that is sustainable so that they do not face the prospect of running out of money or spend precious years worrying that they might. 

Click here to download the full 2023/2024 Retirement Reality Report