The excitement of getting our first job is one memorable experience. It is also a time where we need to properly plan for our upcoming salaries. Properly planning for our anticipated salaries requires us to identify our short-term, medium-term and long-term financial and lifestyle goals long before our first salary. This will keep us focused on accomplishing the vision we have developed, and it will also save us from some of the unnecessary urges we will encounter upon securing employment.
Not many of us think of our salaries from their entirety. And that lack of perspective is what will usually take us off our financial planning track easily. It is common for individuals to secure satisfactory employment after university or around the age of 25 years old. Therefore, someone that is 25 years old and earns a salary of P3,000 per month will have a total of P36,000 per year (P3,000 x 12 months). This will accumulate to P1,260,000 (P36,000 x 35 years) by the retirement age of 60 years old. This amount is a minimum prediction as along the way we may be promoted at work, invest wisely, or have additional jobs on the side to increase our income. Also, this income does not take into account the expenses that we will incur along the way, such as rent, mortgage payments, vehicle payments, school fees for our children, medical aid subscriptions, food bills and so forth. Therefore, having a wholistic view of our minimum total income can change a few aspects with regards to our identified financial and lifestyle goals. How much would you have earned by the time you retire? And does that amount give you a new perspective on your ability to efficiently and effectively financially plan?
The peak employment and pre-retirement age group of 36 years to 59 years of age is one that many have found to be more challenging if prior planning was not properly done. These challenges have brought to light of what we have come to know as a mid-life crisis. Which is a very complex stage of life that involves confusion, self-doubt, anxiety about the future, regret from prior years, the urge to stay young forever and dramatic lifestyle changes. It is important to be aware of our state of mind as we grow older and wiser. We need to accept the realities of what we can change and what we cannot change. Which are all components of having emotional intelligence. Thankfully, we can overcome this not so rare stage by seeking help, support and going back to the drawing board. It is never too late to start over and plan for a new way forward.
Our financial planning topic for this week is THE PRE-RETIREMENT CHECKLIST. The final stage of the pre-retirement lifecycle stage is the time in which we discover if we have properly planned for and able to have a comfortable retirement life. For some people, it is all fun and games until the year right before we retire. It is unfortunate that many retirees are not living a comfortable retirement life. The reality is that the national pensioner allowance and monthly retirement annuity income alone will not be enough to maintain our lifestyle going forth. In some cases, others are forced to continue to work to be able to accomplish the goal of living comfortably after retirement. It is good to seek help once we recognise that we are faced with such challenges. However, there is such a thing as seeking help too late and have the expectations of financial planners to work magic and pull miracles to solve these challenges. Therefore, it is important for us to keep track of our financial planning progress leading up to the year of retirement. Having an early diagnosis of these challenges can drastically overturn the outcomes for the better.
As we grow older, our priorities will change and so will some of our financial and lifestyle goals. Change can be good and a time like retirement is one that should also be celebrated. The anxiety of facing retirement can be eased by viewing our financial planning pre-retirement checklist from the base of P-S-M-L: Protect – what we have accumulated; Sustain – a comfortable retirement life; Multiply – our current resources; and Legacy – generational wealth and succession
With the focus on older adult individuals, from the age of 45 years onwards, we can use a P-S-M-L base together with lifecycle financial planning.
The cycle of life is that we are born, we grow, and we die. Growing older is not a bad thing but the dynamics do change. It is typical for a seasoned adult to now fully own many major assets such as vehicles and property. This can go hand in hand with having the least amount of debt repayments remaining for those assets acquired using debt in our younger years. The financial planning components involved in protecting what we have accumulated include:
· updating a valid will – to achieve the purpose that makes sure that our wishes regarding [all] our assets (including leruo le le ko morakeng) are met and most importantly protect our families from any confusion in the event of death
· a funeral policy or arrangements – finish-off funeral policy payments (if we made sure to tick off the option to only pay up to the value of the components of the policy) or finalise funeral arrangements to avoid our families from experiencing the financial burdens associated with our final departure from this life
· a medical aid or insurance – to maintain good health (physical, mental and emotional) as medical expenses increase with age
· and an emergency fund – to have a financial safe haven for spontaneous events such as to cover medical aid or insurance gaps, weddings, vehicle breakdowns and so forth
Many of us have accomplished a happy life, peace, wellness, a higher pay check, a better standard of living, financial stability, financial freedom, raised our children and so forth. However, sustaining an accomplished lifestyle after retirement comes with many challenges of diminishing health, increasing medical expenses, assets that need maintenance, financially assisting adult children, possibly less income and the planned loss of a job. Retiring from a job that is now built into our lifestyle and habits can still feel like a loss. Therefore, we must also make use of the counselling benefits offered by our medical aid or insurance during this transition. The financial planning components involved in sustaining a comfortable retirement life include: re-evaluated budget – to adjust to the changes that come with no longer having that regular main salary; debt management – pay-off all debts; a national pensioners allowance – to provide us with a regular income; a retirement fund withdrawal – to provide us with a significant initial cash income and/or regular income on a monthly or annual or any other timely basis (we need to know how much retirement benefits we have or will have long before we retire); and a diversified investment portfolio– to provide us with additional income in the form of interest and dividends or can be sold-off to provide us with a large cash injection into our new life.
With the regular flow of our main salary and income coming to an end, it is vital to review our financial status and new capabilities. Very few people can manage to sustain their current lifestyle into retirement, thus forced to downgrade. Therefore, we need to properly plan and prepare to sustain this new season of our lives.
We need to be mindful that the older we get, the higher the rate of borrowing or acquiring credit. These rates drastically increase to cover the risk associated with aging. And in some cases, there are ages where credit companies will simply reject our applications. This is a form of discrimination, but the credit industry continues to be smart about justifying these unfair practices. We need to also be aware that should we not pay-off all our debt by the time we retire, some debts can be deducted from our retirement fund before it is released to us.
It is important that we know and understand the type of retirement fund we have (pension, provident, preservation or retirement annuity fund) as these funds have different aspects with regards to withdrawals. These differences range from having the allowance of a 1/3 cash withdrawal and 2/3 compulsory annuity, or a full cash withdrawal, or only monthly annuity payments or a one-time cash withdrawal. If there is a cash withdrawal, this can be used to pay-off all our remaining debt. Some of us have used this cash withdrawal allowance to start large housing projects that are still incomplete or purchase luxury cars that are now difficult to maintain. There is nothing wrong with rewarding ourselves for our hard work, but we must do so realistically and with a proper plan.
With regards to annuities, this is also the time in which we must know, understand, compare and nominate a retirement annuity product for which will be purchased by our retirement fund. Annuity products are mostly offered by insurance companies such that the main or original producers of retirement annuity products are Metropolitan, Botswana Life and Bona Life. Other companies offer annuity products that are either re-sold with a service addition or with minimal product improvements using the products offered by these three insurance companies. Therefore, we must not only compare benefits but also costs when purchasing an annuity product.
Ultimately, our affordability is our biggest consideration when we transition into our new life of retirement in this P-S-M-L stage.
We usually do not have as much room for growth at our age as we did in our younger years. But, because we developed a good habit of increasing what we have, we can still continue to do so at a softer level. We can do so by using the funds we acquire from our other resources (such as rented property, combis or agriculture) to continue to maintain and grow these resources. Therefore, it is a form of closed re-investment whereby the resource profits attained now operate our resource investments. The financial planning component involved in multiplying our current resources include:
· a savings account – to build up funds to re-invest in a specified project or achieve a short-term goal to jump our resource management into high gear. Another account can be set up so that our adult children can contribute regular funds into it to help take care of us
Building a legacy for our future generations is not an easy task. With our history full of many changes and gaps in cultural knowledge and wisdom, navigating to pass on generational wealth and succession planning can be challenging. We need to pass on more than just money to our future generations. We also need to make sure that, for right now, [who] we pass anything onto (such as our children) have the capacity to accept it. The financial planning components involved in leaving a legacy for generational wealth and succession planning include:
· updated life insurance policy – to provide our families and dependents with more financial stability and return the insurance payments we have made, in the event of our death. Money cannot replace us, but money can help comfort our families
· and a trust – to house our entrepreneurship ventures, additional investment portfolios and other resources in a structure that is purposed to protect them and benefit our families, dependents and nominated beneficiaries
Other considerations include regular taxes and capital gains tax. We can also go above and beyond to start or nominate a charity we can support and to which we can transfer our time. Retirement is leaving regular employment to reap the benefits our hard work. Take the time to remember and appreciate the journey thus far. There is more to come and there is more to enjoy.