Planning and saving for retirement seems to be a very simple affair, but in fact it is not with many risks you have to circumvent.
Retirement should be a time of financial freedom, enjoyment and spending more time with your family and close relatives, but without proper financial planning, it can come with serious risks and consequences.
Stian de Witt, head of financial planning at advisory firm NMG Benefits, has shared five critical risks retirees face and how working with a certified financial planner can increase your retirement income longevity by up to 12 years.
#1: Liquidity risk
One of the biggest challenges in retirement is maintaining a stable income, especially when markets fluctuate, De Witt says.
“Liquidity risk arises when retirees need cash for daily expenses but find themselves forced to sell investments at a loss during market downturns.
“To avoid this, it is important to maintain a portfolio with a Money Market or Income Fund that can weather temporary market dips without affecting long-term investments.”
ALSO READ: 50 and still haven’t saved? Here’s how to kickstart your retirement plan today
#2: Inflation risk
Inflation eats away at purchasing power over time, making it essential for retirement income to grow beyond the inflation rate, especially after taxes and fees, he warns.
“Many retirees believe that Money Market funds are a safe bet because they offer guaranteed capital protection.
“However, after adjusting for inflation and taxes, these funds might barely keep pace or even lag, reducing retirees’ real income.”
#3: Tax risk
High tax rates can seriously reduce the value of your retirement income, De Witt says.
“For instance, a 10% return reduced by a 45% tax rate leaves only a 5.5% after-tax return. Many retirees overlook tax-efficient investment options, missing opportunities for substantial savings.
“By using various investment vehicles and asset classes, retirees can take advantage of tax exemptions and deductions.
“A certified financial planner can help retirees achieve up to 20% in tax savings, which can translate into an extra two to four years of retirement income.”
ALSO READ: We are living longer – how to plan for a long retirement
#4: Sequence of returns risk
Research shows that if markets take a significant hit in the first two years of retirement, it could reduce a retiree’s portfolio longevity by up to seven years.
De Witt warns entering retirement during a market downturn can have lasting effects.
“Managing the sequence of returns risk involves diversifying investments and potentially adjusting withdrawal rates to avoid depleting the portfolio during early retirement market declines.”
ALSO READ: The three phases of retirement and how to maintain your quality of life
#5: Fund selection and asset allocation risk
South Africa has over 1 700-unit trusts, each with different fees, performance histories and growth potential.
Choosing the wrong fund, especially one with high fees (over 2% per year), can significantly reduce portfolio growth, De Witt says.
“Low-growth funds or high-fee structures can cut a retirement portfolio’s lifespan by one to two years. A carefully selected portfolio, with attention to costs and performance, can support long-term growth.”
De Witt says a financial advisor who considers all five risks can make a significant difference to your retirement portfolio’s longevity.
“The stakes are high, but with the right planning, retirees can secure their financial freedom, reduce unnecessary risks and enjoy peace of mind throughout their retirement years.”
