Discover the essential factors to consider when planning your retirement income, from accommodation costs to healthcare expenses. Picture: Pexels.
By: Hannah Myburgh
The strength of any retirement plan lies in the accuracy of its assumptions, with one of the most critical being the calculation of post-retirement income. Consider the following key factors when planning for your retirement years:
Accommodation
Many retirees aim to downscale their home at retirement, hoping to free up capital and find more manageable living arrangements. However, a smaller property or retirement unit doesn’t always mean lower monthly costs. To avoid surprises, thoroughly research expenses and carefully review all associated costs before making a decision.
When residing in a sectional title unit, you must budget for monthly levies and their annual increases. These levies, set by the body corporate, cover expenses such as road and garden maintenance, cleaning, security, personnel, insurance, rates, and taxes. They are intended to manage all costs the body corporate incurs throughout the financial year. Complexes offering premium amenities such as jacuzzis, gyms, tennis courts, libraries, or clubhouses will naturally have higher operating expenses, which translates into increased monthly levies for residents. Proper planning is essential to accommodate these costs.
Life rights schemes often have lower monthly levies and administration costs compared to sectional title units. Developers are also required to provide a two-year cost estimate for levies, making these expenses more predictable and easier to budget for. Conversely, if you plan to downscale to a freestanding property, you’ll need to budget for ongoing expenses like rates, taxes, water, and electricity. Additionally, escalating energy costs should be factored into your financial planning to ensure your retirement budget remains sustainable over time.
Entertainment, exercise, and local travel
With more time on your hands, expect to increase your line-item expenditure for entertainment, local travel, subscriptions, and membership fees. In the years leading up to retirement, you will no doubt have a feel for the activities and hobbies you would like to enjoy more fully in your retirement years, so start investigating these costs and creating a realistic budgetary framework. Costs may include gym membership, sports clubs, hobby groups, book clubs, and hiking/walking organisations, so be realistic about what it would cost to enjoy these activities after retirement.
Capital outlays
With extra time in retirement, you may see an increase in expenses for entertainment, travel, subscriptions, and memberships. As you approach retirement, consider the hobbies and activities you plan to enjoy and start researching their associated costs. By understanding these expenses early on, you can create a realistic budget that aligns with your lifestyle goals, ensuring you can fully enjoy your retirement without financial surprises. Be mindful of balancing enjoyment with affordability. To ensure sufficient discretionary capital, list the significant expenses you may realistically encounter to be enough to cover these additional costs, meaning you may need to draw from your discretionary funds. Striking the right balance between your compulsory and discretionary portfolios, and determining when and how much to withdraw, is key to a sustainable retirement plan.
Healthcare costs
Healthcare costs tend to rise faster than consumer inflation, typically outpacing it by around 4% annually. Consequently, your medical aid premiums will increasingly account for a larger share of your expenses over time. As you age, healthcare needs may necessitate upgrading to a more comprehensive plan, which comes at a higher cost. Therefore, when planning your retirement budget, it is prudent to account for annual medical aid premium increases—along with gap cover premiums—at a minimum rate of inflation plus 4%.
Elderly care
One of the most challenging costs to budget for in retirement is the potential need for assisted living, frail care, or home nursing. As you age, the likelihood of requiring some form of elderly care increases, which can lead to significant rises in your healthcare expenses. It’s essential to ensure that your retirement plan is designed to accommodate these future needs. Your annuity income may not be enough to cover these additional costs, meaning you may need to draw from your discretionary
funds. Striking the right balance between your compulsory and discretionary portfolios, and determining when and how much to withdraw, is key to a sustainable retirement plan.
* Myburgh CFP® is a financial planner at Crue Invest (Pty) Ltd.
PERSONAL FINANCE