Small lifestyle, investment adjustments go a long way in the final years before retirement

While the benefits of a long term financial plan are well known to most investors, many people do not consider the effect that preparations and small adjustments in the final 5 years before retirement can have on one’s retirement savings. As life expectancy increases and the cost of living rises with it, these final adjustments are becoming crucial to the comfort of one’s retired years.

This is according to Anil Jugmohan, CFA Investment Analyst at Nedgroup Investments who says that waiting until retirement to research investment options and choices is leaving it too late.

“At the point of retirement, retirees are suddenly forced to choose where and how to invest their retirement savings. Often very little thought has been given to this decision up until this time – and this can result in a savings shortfall in retirement,” he says.

According to Jugmohan, investors should decide years before retirement which investment vehicle they are most likely going to select on retirement as this will affect how/where one is invested in the years running up to retirement.

“If one’s funds are going to be invested in a living annuity, then it’s not necessary to be as conservatively invested in the final years leading up to retirement. However, if the member selects a traditional annuity, their investment timeline becomes progressively shorter the closer they get to retirement. They therefore need to need to begin transitioning towards more minimise their risk capital protection during this period,” he says.

Jugmohan urges investors to make some very valuable adjustments to their lifestyles and investments to optimise their savings in retirement.

“First of all, people need to be cognisant of the fact that humans are living longer now than we thought 50 or 60 years ago, which means that people need to plan to be in retirement for longer than they may have anticipated. Unfortunately, this also means that an even greater number of investors nearing retirement have probably not saved up enough to meet their retirement goals and people in this situation will need to revise their expectations about the standard of living or level of luxuries that they expect in retirement,” he explains.

Furthermore, Jugmohan says people must prepare for an increasing portion of retirement savings being required for medical costs as they get older. “South Africans need to account not only for a potentially longer retirement than anticipated, but also a larger healthcare bill.”

Jugmohan says in order to optimise their investments in the pre-retirement years, investors should take steps to ensure that their investments are performing better than inflation. One way to achieve this is to ensure that you are not just investing in the best performer over the short term, and to instead invest based on your timeframe, objectives and risk profile while being cognisant of global economic and market conditions. He urges investors to check in with a financial advisor who can keep them abreast of these developments within the context of their broader financial plan.

“Managing costs is also key to optimising one’s last few pre-retirement years and as we heard in the recent Budget Speech, Treasury continues to develop many incentives to encourage savings in South Africa. Investors should make the most of these options as they can result in significant financial advantages,” he says.

Jugmohan also points to the following pre-retirement adjustments that investors can make to help maximise retirement savings:

  • Budgeting “In the last few years before retirement you should keep careful track of spending and make a concerted effort to adjust bad habits and create a sensible spending regime before you reach retirement,” says Jugmohan.
  •  Educate yourself Jugmohan says that behavioural mistakes can cause serious financial losses for investors. While financial advisors will nevertheless be available to provide sound advice, an educated investor will be better placed to implement this advice.
  •  Take advantage of small cost and tax benefits along the way Jugmohan urges investors to find out about and make use of all investment incentives available to them as these incremental savings all add up over time.
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