The concept of retirement is changing, both out of necessity and the ‘problem’ of longevity. I find more of my pre-retirees now actively plan for a transition into retirement. If you’re in a salaried position with a ‘sell by date’ in your letter of employment, this event is going to be foisted on you unless you’re valuable, when they might magnanimously offer you an annual contract at their convenience. Part of retirement planning is making sure you’re kept out of mischief in your reclining years, especially in those early years of retirement, when (hopefully) you are still energetic enough, and corporate life hasn’t worn you down. To quote a line from Housemaid’s Tale, “Nolite te bastardes carborundorum”, translated as “don’t let the bastards grind you down” (pig Latin, not true Latin for anyone interested; in true Latin it is “Noli pati nothos te conterere”.)
Every early-retirement journey is different and will require different levels of funding; that is an important point to discuss with your advisor. It might be the first time you’re thinking about it. Bear in mind that drawing down heavily on your capital in the early years can significantly impact its ability to sustain the income going forward. There are heuristics that you can use to determine the ‘right’ level of capital and draw down, and I have written about this extensively in the past – so I won’t repeat it here.
There is a growing trend with retirees, hopefully with an empty nest and without too many dependents still hanging around, to enjoy travelling more and taking longer vacations, even becoming ‘swallows’. In later years this may tail off, but medical and care expenses may increase. Planning for these ‘phases of retirement’ – even in 5-year increments – will result in a better long-term outcome. Bear in mind that those returns that are so glibly assumed at a flat rate out 20-30 years vary considerably on a year-to-year basis, and if you manage to catch a nasty recession in the early years of retirement, then you could put a nasty hole in your retirement that you may never recover from.
In my opinion, it’s important to embrace the interconnectivity of your investments in retirement. They are not separate buckets/silos – but can and should be interconnected – especially if you want to optimise the flexibility and tax erosion. One analogy is to visualise your retirement funds as a beehive. Each cell in the hive is separate, and it can live, grow more worker bees, store honey or die – without upsetting the whole hive. (For those apiarists (beekeepers) and entomologists out there, yes, hive collapse is a thing, but so too is bankruptcy.)
Using that analogy, in early retirement it makes sense to keep a few worker bees going and not draw down your stores of honey too soon. There needs to be a balance. During the growth phase pre-retirement, you’re building your hive, throwing as much as you can/need to that retirement event. Once it’s out of the growth phase, though, and you ‘need’ the honey, you need to also leave enough behind to sustain and grow the hive so you will have the colony for the rest of your life and even leave it as a legacy. (In nature, bee hives have been known to survive over a hundred years). However you want to think of it, the sustainability of your income must be top of mind.
Everybody has a different view of what retirement should look like, and there is no ‘right’ way. There are those on one end of the spectrum who never want to retire (me included) because they love what they do – or have to continue working. At the other end you’ll have people who can’t wait to get out of ‘work’ and will save every last cent so they can retire as soon as the colony is big and sweet enough.
Every point along that spectrum will need funding, and ideally not all from one place. If all your retirement income is going to come from one place – say a company pension or RA – then you are going to lose flexibility to create the retirement you deserve. Ideally, more cells/buckets mean reduced risk and increased flexibility. More cells can be protected from misadventure so the honey stored there can be tapped when needed. (On a side note – if you’ve ever wanted a beehive at home but are vaguely aware of how much work it can be, have a look at these: https://www.flowbeehive.co.za/ turn the tap and you have your honey).
You may not know that almost all investments can ‘mimic’ a pension without being in a formal pension fund, but it requires a deft hand. The basic concepts stay the same – taking a prudent income (especially in the early years) and reinvesting ‘cash flow’ (interest, dividends, bond coupons etc) to add to the growth in equities. Done right, the income will never run out, even if you live long enough to get a 100th birthday card from King William V or King George VII decades hence (if you live in the UK, of course).
In your retirement education journey, two concepts are important to wrap your head around: HOW your capital will pay you an income, and HOW you still get the capital to grow despite drawing down an income. If you’ve followed my posts, you know that I care little about making myself unpopular in my profession by exposing ‘secrets’ that many would rather leave unsaid – so here goes with another one…
If you get to the retirement ‘event’ and the capital you have accumulated cannot sustain the income you need without impacting the capital to such an extent that the income is likely to run out before you do, then it’s going to be time for a very uncomfortable conversation… The advisor will tell you what is prudent and when it will run out (they are required to do so in terms of the FAIS Act), and if it’s not what you’re expecting, you’re probably going to rail against that. It’s your money, and ultimately an advisor will probably ultimately do what you ask. They know that they will be long gone before the hive dries out and the income runs out. They will have effectively absolved themselves of the risk in their communication, but rather than lose the business (and their commission), they will do what you ask rather than walk away. (I walk away).
There are nuances, but as a rule of thumb, you shouldn’t draw down more than 4,5% – 5% pa from your investments if you want the investment to produce an income over your lifetime. In terms of the Pension Fund Act, you can draw a maximum of 17,5% – which will then be taxed, of course – and then, with the best will and markets in the world, that hive is going to be dry in around 8 years. For my retirees, I give them monthly feedback on how their retirement hive is doing – not just a statement; that way we can nip a problem in the bud very quickly, not let it ‘play out’ over a few years.
Story time… Let me tell you a time when we walked away. A retiring professional called us in with a sizable pension that most of us can only dream of (mid 8 figures). The problem was his monthly expenses were massive – over R450k pm. He still had a huge bond; his wife insisted on a top-of-the-range new Merc every year, and his kids in their 40s still lived with him and mooched off him. Even though he had this great pension by ‘normal’ standards, he would need to “draw down” close to the 17,5% level. He was 6 months post-retirement when we saw him and had gone through his savings and equity in his bond, trying to get the ‘right answer’ from an advisor. We walked away from this client, as I suspect several others had before us, but no doubt someone gave him his 17,5% and was long gone before the 8 years were up.
Articles and Blogs:
Investment series part 4(NEW)
Investment series part 3 (NEW)
Investment series part 1
Investment series part 2
Legacy Series Part 4
Legacy Series part 3
Legacy Series Part 2
Legacy Series Part 1
Holiday checklist
Next year – Action Plan
Next year – Vision, Mission etc
Medical Risk Mitigation
Next Year – Consolidation
Abdication or diversification?
Carbo-loading your retirement Spoiled for choice
Who needs a plan anyway
8 questions you need to ask about retirement
What to do when interest rates drop
How to survive volatility in your investments
What to do when interest rates drop
Difficult Financial Conversations
Financial Implications of Longevity
Kick Start Your Own Retirement Plan
You matter more than your kids in retirement
To catch a falling knife
Income at retirement
2025 Budget
Apportioning blame for your financial state
Tempering fear and greed
New Year’s resolutions over? Try a Wealth Bingo Card instead.
Wills and Estate Planning (comprehensive 3 in one post)
Pre-retirement – The make-or-break moments
Some unconventional thoughts on wealth and risk management
Wealth creation is a balancing act over time
Wealth traps waiting for unsuspecting entrepreneurs
Two Pot pension system demystified
Cobie Legrange and Dawn Ridler,
Rexsolom Invest, Licensed FSP 45521.
Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za
Website: rexsolom.co.za, wealthecology.co.za