Understanding a Comfortable Retirement

One of the most satisfying elements of my job is when I sit down with a client on the cusp of retirement and say the words: “Congratulations! You have enough for a comfortable retirement.”

This short sentence infers so much, yet almost seems inadequate for such an incredible achievement.

Whether achieved by an entrepreneur who has bought and sold businesses or built a business up over the years, or a hard-working corporate employee who has sacrificed consistently over a career spanning 40 years, the reward makes it all worthwhile.

Every client has a different story about the challenges and temptations to spend today what they needed to save for “one day” – a day which finally arrives.

Yet one thing is consistent with every single client: the impact of returns and fees on their individual journeys.

At Heritage Wealth Partners, we report our returns net of fees because this is the actual return that is working wonders for your retirement nest egg. Even for the most dedicated saver, post-retirement investments can be tricky. The difference between a successful plan and one that fails in 20 years can be as little as 1% or 2% per annum.

After decades of providing for your family, you deserve to sleep at night knowing that your retirement is truly catered for.

In this Part 1 of this series, we focus on the concept of a comfortable retirement and the key points to be considered. In Part 2, we will focus on how we achieve this for our clients.

Asking the right questions 

The market seems to be waking up to the realisation that the science of financial planning and the art of wealth creation mean far more than just selling policies. Those days are thankfully over, as South Africans demand better performance from their advisors.

At Heritage Wealth Partners, we’ve never operated in the traditional way. Instead, we focus on doing the right thing for our clients and charging a fee structure that is aligned to this.

For example, we recently assisted a client who is trying to determine whether he can afford to retire a few years early. By offering a consulting service in exchange for a fixed fee, we were able to give independent advice that focused on showing a range of outcomes rather than pushing a specific product for the sake of earning a commission.

It was a great case study for many of the questions that our clients should be asking, including:

• When is a retirement considered “comfortable”?
• What assumptions should be used for growth in my investments and what is the impact of missing that target?
• What are the tax implications of withdrawing my pension / provident / retirement annuity funds?
• What are the different types of living annuities and how flexible are they?
• Do my beneficiaries receive the remaining funds from my living annuities in the event of death?
• If I plan to do contract work once retired, should I set my living annuity to pay the minimum income over that period?
• How is my portfolio structured to ensure I have sufficient income as well as capital growth?
• What is the ideal mix of onshore and offshore funds?

Let’s touch on some of these concepts.

A comfortable retirement

Sadly, for most South Africans, their retirement plan is to be supported by their families. For others, they have enough retirement savings to see them through to their mid-70s, but not beyond that.

A truly comfortable retirement is when you can live off the income from your investments, growing at inflation every year, without digging into your capital until your late 80s. If you live beyond that, then the capital may need to come into play or the income may need to decrease, but you will still be ok and won’t be a financial burden for your family.

Of course, very few South Africans manage to achieve this. The goal must be to get as close to this as possible. Despite working your whole life and making good decisions, the wrong financial plan can quickly turn a comfortable retirement into a disaster. The right financial plan could turn a marginal retirement into a comfortable one.

Here are examples of where it can go wrong:

• Setting income levels too high, which depletes the capital and results in serious financial strain in the final years of your life. 
• Suffering poor investment returns on your capital e.g. money market rates that are frequently below inflation.

• Paying avoidable taxes on the entire portfolio purely because withdrawals and transfers were not properly planned for.

No matter how financially astute or educated you are, this is a complex topic and there are many technical nuances behind it. That’s why you need an expert to help you.

In Part 2 of this series, we discuss the strategies that we use in achieving and maintaining a comfortable retirement for our clients.