Are you financially ready for retirement? This is a question you will have to face sooner or later. Confronting the truth can be a painful exercise, but the sooner you deal with your reality, the more options you’ll have available to you. One of the keys to understanding the fundamental reasons for early investment is to stay abreast of investment news which pertains to you. We often don’t fully understand the value of early investment and a little more knowledge in the space can make a substantial difference to your decision making at the end of the day.
If the terms of your retirement are not dictated by your age and health, then it is worthwhile running through the questions below. It is important that you don’t leave the workforce too soon as it is often difficult to reenter.
- Is longevity in your genes?
Research shows that longevity is genetic. If you are destined to live longer, you will need to save more to sustain yourself during those extra years.
One of the major risks facing pensioners is longevity. In South Africa, almost 50% of pensioners live to the age of 85, almost 20% live to the age of 95, while around 10% live to be over 100 years old. Therefore it makes sense to plan for these extra years. Remember, these numbers represent averages. Consider your best/worst case scenarios before retiring.
- Have you saved enough money?
It is generally accepted that saving approximately 17 times your final pre-tax annual salary will allow you to retire comfortably. This equates to about 75% of the income you received prior to retirement at the age of 65 (assuming your income gets an annual inflationary increase and you draw 4% from a living annuity).
- Have you accounted for inflation?
Inflation affects almost all services and goods over time. It does not discriminate and eats away at your money’s buying power. This is why buying power is better measure of wealth as opposed to how much money you have.
Factor in educational and medical inflation when assessing your income requirements since they are typically above the average inflation rate. Education is often excluded when estimating your retirement needs – but you may still be paying for your children or grandchildren to finish their studies.
Are you concerned about the questions above?
Always be realistic about your savings and your potential lifespan. This helps to develop a plan that will account for the major risks you may face: outliving your money and the erosion of your money’s buying power due to inflation. If you are concerned then you should consider postponing your retirement and continue saving during the working years. This allows you more time to save and leaves you with less time to live off your savings.
What are the next steps if you are ready to retire?
Don’t make the mistake of thinking that retirement ends your investment cycle. It is, in fact, the beginning of the next phase of investment. Your money should work hard for you. Inflation is your money’s greatest enemy over the long term so avoid being too conservative. It is always in your best interest to think very carefully before making any decisions.
Kara Perez is the original founder of From Frugal To Free. She is a money expert, speaker and founder of Bravely Go, a feminist financial education company. Her work has been featured on NPR, Business Insider, Forbes, and Elite Daily.