Four Retirement Planning Mistakes to Avoid

Retirement can be a challenging journey without a comprehensive plan and a clear roadmap. Failing to plan adequately for this phase of life often leads to financial uncertainty and the inability to maintain your desired lifestyle.

Below we outline four retirement planning mistakes to avoid and how to stay on track.

1. Not Having a Clear Budget

Retirement often brings the joy of more free time and flexibility, but it can also make it easier to overspend. Especially in the early years of retirement, expenses can add up quickly as you adjust to a new lifestyle—whether enjoying more activities with grandkids, undertaking home renovations, indulging in high-ticket hobbies, or traveling. It’s crucial to understand what your limits are in retirement and to maintain a balanced financial approach to ensure your long-term financial security.

How to Stay on Track:

Consider developing a budget that prioritises essential needs, followed by a secondary budget for lifestyle spending (budget goals). This approach should be integrated into your financial plan, providing a clearer understanding of how your spending affects your overall financial position and investments.

The graphs below indicate how we incorporate lifestyle spending goals and annual budgets into your financial planning model.

2. Not Taking on Enough Risk

As retirees enter the next phase of their lives, it’s common for them to prioritise safety and stability in their investment strategies. This often leads to choosing more conservative options, such as lower-risk assets. While this approach may feel reassuring in the short term, it’s important to consider the long-term implications – especially since many retirees may live for another 20 to 35 years.

One of the biggest risks in retirement is not taking enough investment risk, which can yield better long-term returns. While low-risk, conservative investments may feel comfortable, this strategy could lead to challenges down the road, specifically if your investments aren’t growing at a rate that outpaces inflation, potentially resulting in you outliving your capital. In the long run, this could result in a reduced standard of living or having to drastically cut your expenses.

The graph below illustrates the potential outcomes for two living annuity investors, each with R5 million. The first investor follows a conservative strategy (CPI +2-3%), while the second investor adopts a balanced strategy (CPI +4-5%). Both are withdrawing 5% per annum from their annuities, with a 6% annual increase in withdrawals. The difference in their strategies highlights the potential long-term impact of investment decisions on the sustainability of retirement income.

Per the chart below, the higher risk strategy results in your capital lasting 5 years longer.

How to Stay on Track:

Regular Portfolio Reviews: Regularly review your investment strategy to ensure it aligns with your long-term goals. As you progress through retirement, your needs and risk tolerance may change, so it’s important to adjust your strategy accordingly.

Consult a Financial Planner: Working with a financial planner ensures your strategy is aligned with your retirement goals. A planner can guide you in adjusting your risk tolerance and asset allocation to help prevent the risk of outliving your savings.

3. Underestimating Inflation

From our experience, many investors calculate their total retirement expenses using a single inflation rate, the official CPI (consumer price index) rate, which is currently 3.8%. However, each person has a different expenditure basket, leading to an individual inflation rate. For example, medical costs typically rise at a higher rate – around 8% to 9% annually. Given that healthcare can form a significant portion of your retirement expenses, failing to account for this more accurately can lead to underestimating the funds required to maintain both your lifestyle and medical needs during retirement.

The graph below illustrates the difference in projected values when modelling personal expenses at an inflation rate of 5% versus 8%, assuming an initial annual amount of R5,000. This comparison highlights the significant impact that higher personal inflation can have over a 25-year retirement period.

How to Stay on Track:

To ensure you’re adequately prepared, it’s essential to model both your personal and lifestyle expenses separately. By working with your financial planner to factor in higher personal inflation, you can make sure you have sufficient funds to cover all your personal living expenses.

4. Underestimating How Long Your Retirement Income Needs to Last

Longevity is an accelerating macro trend; if you retire around age 65, you could spend a quarter-century or more in retirement.

Without a clear understanding of your current financial situation and retirement needs, it becomes impossible to set realistic and achievable financial goals – or to work toward them. Research shows that only four out of ten pre-retirees and retirees currently use, or plan to use, the services of a professional financial planner, yet over half have not calculated how much they need each year to live comfortably in retirement.

How to Stay on Track:

By creating a financial plan and a comprehensive budget, a financial planner can assist you in preparing for the longevity of your investments. The graph below illustrates how incorporating all these factors will provide you with a clearer view of your financial picture.

Retirement is a significant life transition, and it’s natural to feel some stress or uncertainty about the future. However, having a comprehensive financial plan in place can provide the reassurance and peace of mind needed to navigate this phase with confidence. By developing a strategy that aligns with your long-term goals, we can address potential risks, ensure income stability, and optimise your financial position throughout retirement.

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