Financially, emotionally, psychologically and physically.
Retirees have to be resilient. One often hears that getting old is not for sissies, and the more I deal with retirees (and the older I get …), I realise there is a lot of truth in this statement.
The changes that occur when entering and into retirement are often underestimated. The challenges that retirees must face often do not diminish. As one ages, challenges tend to escalate not only in intensity but also in numbers. Without a decent support system and proper planning, which was done in the past, retirement for many is not a pleasant experience. This is sad because retirement should be when you enjoy the fruits of your past hard labour …
Realistically, one must accept that with age comes diminishing health, memory, strength, and increasing emotional challenges. There is not much that one can do about this, but one can reduce stress and emotional worries by making sure that financial challenges are minimal and, at the very least, that you understand what your future financial position will be and adapt your lifestyle accordingly.
The good news is that it is not always doom and gloom. We often find that the first concern when discussing financial affairs is running out of money. In many cases, the concerns are not justified. It is more a matter of understanding your financial affairs and placing your financial needs first.
Far too often, retirees are burdened with their children's or family members' financial affairs. Having a hard talk with children before retirement may be necessary. If you don’t and keep funding children, then the discussion around who will fund you and pay your medical expenses in retirement when your funds run out becomes crucial.
We see far too many retirees funding their children’s failed business ventures, assisting with property purchases, paying private school fees, etc. If you have substantial wealth, this is fine. For the majority of retirees, unfortunately, this spells doom. I know, as parents, we want to help our children as much as possible, but please take your needs into consideration first because your children will probably not be able to help you financially if you run out of funds. I have diverted a bit, but this is a very serious problem that occurs far too often.
Let’s get into the article's theme and discuss the four challenges I mentioned at the beginning. For different retirees, the challenges will rank in a different order of importance.
Financially
Financial challenges are the easiest to deal with since they purely involve figure bashing. How much capital do I need to provide a pre-determined income and planned expenses? To determine the capital amount required, the following factors need to be considered:
1) What monthly income will I require at the start of retirement?
Create a detailed budget and stick to it as best you can.
Make allowance for holidays and investing. It is important to keep investing in retirement to provide for unforeseen expenses.
2) What inflation number am I going to use?
Remember that medical expenses are going to increase the older you get. Medical inflation is much higher than core inflation. Use an inflation number of at least 2% above the published CPI.
3) What capital expenses do I anticipate during my retirement?
Replacing a car, visiting children overseas, etc.
4) Do I plan to leave capital for my loved ones?
This is crucial. The more you want to leave your children, the larger the initial capital requirement will be.
When you retire and don’t manage to accumulate sufficient funds to ensure a fair legacy, discuss this with your beneficiaries. Don’t let them live with the illusion of a potential “fat inheritance.”
This will ultimately determine your drawdown rate and the quality of your retired life. If you do not intend to leave a legacy, then your drawdown rate can probably be increased to 7% compared to 4% if you want to leave a legacy. This is a fine line since longevity can throw a curveball should you live beyond the age of 90. Erring on the conservative side by keeping drawdowns below 4% is still the prudent thing to do.
5) Longevity
We generally plan to age 100 as far as an income requirement is concerned. You can adapt longevity according to genetics, health issues, etc., but I suggest not planning for shorter than 90.
6) Emergency reserves
It is always advisable to have a decent amount saved in a cash-type investment for emergency expenses. How much is up to you, but I suggest six times your monthly retirement income as a guide.
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The capital amount that you require as you enter retirement has many variables.
The return on your investment is crucial. Cash is not a viable option since your main objective will be to generate returns above inflation, which cash struggles to do if you consider the taxability of interest earned. Keeping your strategic asset allocation portion of cash in a living annuity makes more sense than keeping it as discretionary funds since returns (including interest) are not taxed within a living annuity. The higher the return you can achieve, the lower the capital amount you require or the lower the drawdown rate needs to be to fund your income requirements.
Invest in portfolios with lower volatility. High volatility has a detrimental effect on the capital value of investments from which you draw income.
Don’t fall for schemes where unrealistic returns and “guarantees” are offered. Too many retirees are often scammed. Stick with reputable advisors and providers. Guarantees are only as strong as the provider of the guarantee.
Consider guaranteed annuities (compulsory and voluntary). Current yields for older people cannot be matched by living annuities and voluntary investments. However, bear in mind that capital dies with the annuitant.
Emotionally
There are many articles about the emotional challenges of retirees, and this topic deserves an article on its own. All the factors that I mentioned at the beginning contribute to retirees' emotional state.
As we age, the emotional roller coaster really starts to pick up speed. Some of the factors below contribute to heightened emotions, and one must find a way to deal with them. The best way to deal with them is through support structures made up of family and friends.
- Losing friends. As we get older, we lose more and more friends to death, and some move to frail care. My father-in-law is 80 and still very active. He hasn’t owned a car for as long as I have known him, and he walks everywhere. He is fit! His circle of friends has reduced drastically over the past five years. If you now discuss his friends with him, he refers to the “inner circle” and the “outer circle” of friends. The “outer circle” are the younger friends that have recently become friends, and the “inner circle” are the ones who have been friends for decades and who still get together weekly for a beer. As the “inner circle” reduces, the “outer circle” becomes more relevant, and they are now being invited to some of the weekly beer meetings. Not all, only some. This is very interesting to observe.
- Children moving overseas. This is becoming an increasing trend in SA. Grandparents become very fond of and attached to grandchildren, and their moving overseas also causes emotional stress for parents and grandparents.
- The feeling of being alone. The death of a partner/spouse or a close friend is traumatic. This is probably the worst emotion that anyone must deal with. There are also many retirees who lose children to death. This is on equal footing to losing a spouse. Where there is no longer a spouse to share in the heartache when a child dies, the emotions are even worse.
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The importance of “belonging” becomes more highlighted in retirement. Where there is no longer a strong family community with much interaction, it is crucial to build your support community. This can be within your retirement village/community, a sports club, or any social community. Get your “inner circle” and “outer circle” of friends in place. Friends become one of your most important assets as you age.
Psychologically
In the same way as emotions, all the factors that I mentioned at the start of this article can and do impact the psychological state of an individual and, unfortunately, more so in the case of retirees. In fact, psychologically, one probably goes through more just before retirement than once you are in retirement. The following factors come to mind:
Leaving a life behind that you were used to for 40+ years.
Self-worth. You were probably in management while employed, and employees valued your opinion and guidance. That’s gone the day you retire.
Waking up to nothing. This can cause severe depression. If you wake up on a Monday morning not knowing what you will do over the next day or five days, you start playing cruel mind games. It is crucial to wake up to something, and this must be planned and put into place before you retire.
Becoming frailer as one ages also negatively influences one’s psychological state of mind.
Financial pressure is one of the largest contributors to depression in retirement.
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Health is the most important factor in keeping psychological (and emotional) demons at bay. Physical, emotional, and financial health all play important parts in ensuring a peaceful and happy retirement. Exercise regularly, plan your finances, stay on top of them, and keep your mind active with something that interests you.
Unfortunately, we can only do so much to prevent physical deterioration, but psychologically, a positive attitude and a strong mind can make us much stronger.
Physically
We don’t have to look far to experience the physical deterioration of the ageing process (termed sarcopenia). That is the one thing that we will all experience to a greater or lesser degree at some stage of our lives, and it will progressively get worse. The evidence is all around us in shopping malls, in our families, on holidays, and on the street. Wherever there are people, there are ones with canes, walkers, and wheelchairs, some with good eyesight, some almost blind.
Science says that after the age of 30, one involuntarily loses muscle mass, function, and strength, with approximately 5% to 8% muscle mass lost per decade. This accelerates after age 60.
Our challenge is how to deal with becoming frail, how to cope with dementia and all the other ailments that will come knocking at our door as we age. This is not easy to accept or manage. In many cases, it will not be possible to manage it on your own. Fortunately, there are many facilities and organisations that provide assisted living and frail care facilities, but it comes at a hefty cost. Most families are not equipped to handle these challenges by themselves.
We also often forget the toll it takes on children and other family members when witnessing the physical, emotional and psychological deterioration of a parent or a grandparent …
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Many of the emotional and psychological challenges can be reduced by belonging. Belonging to a supportive community like a retirement village or a loving, supportive family, and having an “inner circle” and “outer circle” of friends. However, the costs involved in obtaining care can be prohibitive. How do you overcome this?
Include retirement care costs in your long-term financial planning.
Secure your support partners in advance. Trivial tasks like reconciling monthly accounts can become cumbersome. Consider the following:
Appoint qualified people to take care of your administration. The family is not always equipped to handle this.
Make sure you have someone who can monitor your medical aid and provider payments.
Introduce your financial advisors to your family. Let them become a combined unit that looks after your financial affairs.
If your financial affairs are complicated and extensive, consider including an attorney and a tax consultant on your “advisory panel.”
Make sure your will is valid and current, and your bequeathments are still applicable.
Many retirees take the route of granting a child or family member a general power of attorney to take care of financial affairs in case they, at some stage, cannot make decisions anymore. A power of attorney only remains valid as long as the person who granted it is of sound mind and able to cancel the power of attorney. Once a person has dementia or a similar mental condition, the power of attorney becomes null and void.
This article is a bit depressing, but it is very relevant. Rather, accept and deal with these issues while you can rather than leave it up to someone else to deal with on your behalf…
Happy retirement!