Okay, so you are soon to retire in the near future. What is your first step?

Expenses:

Your first and most important step is to list all your expenses as accurately as you can because it is these expenses that need to be paid from your retirement income.

It is my sincere hope that your income will exceed your expenses!

That is your aim in retirement. To ensure that your income always exceeds your expenses.

As time goes by your general expenses will increase in line with CPI (Consumer Price Index) inflation (presently around 6% per annum) so you will require your investment returns to both give you an income and grow with the CPI. However as you get older your medical costs will most likely increase and medical expense inflation is usually higher than the CPI and is presently around 10% per annum. Food inflation can also be much higher at times not to mention fuel, electricity and property rates in South Africa where the inflation has been very high! (many property rates in Durban were put up by the ANC-run municipality often 200 to 300% for most of my clients and friends some years ago) Most of your medical expenses will be covered by your Medical Aid’s hospital plan but often, unless you are in the highly expensive full medical aid coverage, you will need to pay for extra medical costs. And, even if you are on the top medical aid package there are some drugs that may not be covered by your medical aid such as the latest drugs for Alzheimers etc.

Naturally before you actually stop working, you need to have as many liabilities paid off as possible. Such as the mortgage loan for the property you live in, your car loan etc. so that your monthly expenses are decreased to their minimum whilst you are in retirement.

Income:

Now you need to list all your sources of income. Perhaps you rent out a granny flat on your property for extra income. (A very wise idea by the way. This income alone has been a life-saver for some of my retired folk particularly as the income tends to keep pace with inflation and this is so important.)

Hopefully you might also continue working or consulting past the age of normal retirement. Very often this might be of a part-time nature. It doesn’t matter, so long as you enjoy the work and it brings in extra income.  Thing is, if you have paid off all loans, and keep on working, it is a wonderful time to build up further capital. More capital will allow you more income and thus give you a better retirement.

If you have sold your house and are living on the income from the proceeds or have a living annuity you HAVE to ensure that your monies are invested properly. If you invest the monies in bank deposits that pay 5% or so you will be losing capital each and every month from inflation that is around 6%. You will have no real growth on your monies. Failing to properly invest could leave you destitute in a very short space of time. You HAVE to get a really good financial advisor who knows how to properly invest your discretionary monies or your living annuities. Studies have shown that your monies need to have at least 20% invested in equities to benefit therefrom. So why not have a look at the Low Income Multi Asset Prudential Funds for starters such as the Coronation Balanced Defensive Fund and the Prudential Inflation Plus Fund or similar? Besides, these are actively managed lower-risk funds (risk rating 3 out of 10 compared to money market funds at 1 out of 10 and equities at 8 to 10 out of 10) where the fund manager adjusts the fund to suit economic conditions. This saves you from having to continually monitor the composition of your funds. It is all done by teams of very intelligent and absolute professionals. There is no need to re-invent the wheel. If you are well off and can afford to do so you could have 50% of your living annuity in a High Equity Multi Asset Prudential Fund such as the Coronation Balanced Plus Fund. Naturally the older you get and the less money you have in your living annuity or investments, the less risk you should take. If you are over 80 then the Low Equity Prudential Funds would most likely be the most suitable. If you are highly nervous or the stockmarkets are misbehaving and you are 80+ then you may wish to have 50% in say the Coronation Strategic Income Fund. (Risk rating of 2 out of 10) The allocation as described above will need to be worked out with your advisor.

Ask your friends. Do they have an advisor and what has he or she done for them? Is he or she an active advisor who monitors your investments and gives you feedback, or is he often out on the golf course or the 19th hole and never looks at your investments? Investments and living annuities need constant monitoring and good advisers will know exactlly how your funds are doing. They are always thinking if your funds are the best ones for you. There was a time when the Allan Gray Stable Fund was one of my favourite funds many years ago. It then had a wobbly with the result that its performance dropped dramatically. A few years ago the Coronation Balanced Defensive Fund produced a 13% per annum return and the Allan Gray Stable Fund produced an 4% per annum return. The difference here is 9% so this means a difference of R180,000 per year on an investment of R2 million.

The lesson here is also to have two or more funds in the same category. So you could have 50% in the Coronation Balanced Defensive Fund and 50% in the Prudential Inflation Plus Fund. This way you don’t have all your eggs in one basket. As time goes by you will note the under-performance of one fund. Is it a marked under-performance or is it just the vagaries of the markets whereby one fund is ahead for a time and then the other fund is ahead.

I have linked a simple Income and Expenditure sheet that I have created for you to download for free. You can save it to your computer so that you can use it as often as you like. I find in practice that those of my clients who regularly complete their Income and Expenditure Sheet and are thus highly aware of their income and expenses, have the best retirement. They then plan for overseas trips etc. and are the most financially secure. In other words, they know that they are ultimately responsible for their monies. How they spend their monies and in what funds they are invested. It is my job to try to place them in the best funds possible to suit their needs.

You might need to add one or two items that are particular to you. (A basic knowledge of using Excel and very basic mathematics is required.)

http://mark-sandison.co.za/data/documents/Inc-Exp-Clients-and-Web.xls