HOME
Home
 
  Secure your future – it’s never too late to start      
   
 
6 Step Retirement Decision Process 

 

How do I decide on the best pension option for me? (Back to Retirement Benefits) 

 
The two most important questions you probably have are:

• How should I invest my retirement money?
• What amount of income can I expect to get monthly from this investment?

You may find the following "6 step process model" useful in helping you answer these rather complex questions.
 
 
 
Step 1: What are my needs at retirement?

Any reference to "your needs" refers to the needs of you and your dependants.
 
Basic needs
This is the minimum income that you would require in your retirement to retain your basic quality of life. Another way of deciding on this amount is to consider what minimum income you would need, to avoid feeling bad about your standard of living in retirement.
 
Your basic needs typically include the money you need for:

• Accommodation;
• Food for your family;
• Clothes;
• Medical expenses; and
• Transport.
Pensioners have different expectations from life - some pensioners may feel that an income of R3 000 per month is enough to cover their basic needs; others may feel that they need an income of R20 000 a month to meet these needs.
 
The reality is that many people end-up retiring without enough money to meet even their basic needs in retirement.
 
"Good to have" needs
Very few people earn enough money, either whilst they are working or in retirement, to be able to meet their "good to have" needs. Such an income allows you access to most of the things you desire in life.
 
 
Step 2: What will cause me the greatest regret in retirement (the risks)?

Having defined your needs, one needs to consider what key risks you face in meeting those needs and how one can manage these risks.
 
Most people associate the word "risk" with bad outcomes. However, the "flip side" is that taking risks also creates the opportunity for very good outcomes. In managing your risks you should be most concerned about minimizing the chance of outcomes that cause you a great deal of regret.
 
As a pensioner, there are three important risks you must deal with in how you invest your retirement savings in order to meet your needs, namely:
 
• Investment risk
• Inflation risk
• Somewhat quaintly, the risk of living too long!
Investment risk
Investment risk refers to the chance that the investment return you earn on the money you invest at your retirement is insufficient to provide a reasonable income throughout your retirement.
 
The investment risk depends on the asset class in which you invest your money and on how long you can invest the money before you need to use it (i.e. your investment horizon). Investment risk is dealt in detail in the section dealing with investment choice.
 
Inflation risk
One of the big risks you face in retirement is that inflation reduces the buying power of your pension. 
It is very difficult to predict the future course of inflation (i.e. it may go much lower or maybe it could increase sharply). It is therefore important that you invest your retirement money, or at least that part which covers your basic needs, in such a way that your income goes up each year more or less in line with inflation.
 
Risk of living too long (mortality risk)
This seems like an unusual risk - but the longer you and your dependants live, the more money you need whilst you are on pension.
Many people have a pessimistic view of how much longer they will live once they retire. The following table shows, how long, on average a male and female are expected to live if they retire at different ages.
 
 
Retirement age
Life expectancy
Male
Female
55
22 years
27 years
60
18 years
22 years
65
14 years
18 years
 

The above figures may well understate the position, because as medical research improves (and it is improving at a dramatic rate currently), the life expectancy of people will increase.
 
Linking your risks and the needs
 
Now that you have an understanding of your retirement needs and the risks you face in retirement, it is useful to link the two.
 
In meeting your Basic Needs we would suggest that you should not take on any excessive investment, inflation and mortality risk. Ideally you would want a pension that will:
• Guarantee to meet your basic needs each year;
• Will increase each year in line with inflation; and
• Will be paid for the rest of your lifetime and that of your spouse.
On the other hand in meeting your "good to have" needs you can take on more investment, inflation and mortality risk. Ideally you would structure your investments here with the following in mind:
• You would be prepared to take on more investment risk provided that there is a good chance that you will be compensated for this risk. Importantly you can live with the regret that you may feel if the investment return turns out to be poor.
• You have a longer-term investment horizon and if the investment does poorly in any year it does not matter much because you don't need the money.
 
Step 3: What pension options are available?
 
See the first section above for more information on what pension options are available to you.
 
 
Step 4: Which pension option best matches my needs?

Discuss your needs as well as the risks you are prepared to take with a registered financial advisor, who will assist you with matching your needs with the key features of each pension option.
 
 
Step 5: What income will this option secure?

Your registered financial advisor will advise you of the income you can expect for the different pension options.  You can also use the monthly pension indicator in the Toolbox in the menu above to give you an indication of the income you can expect.
 
 
Step 6: Optimise your tax position
 
Most people’s first priority is to secure a pension to meet their Basic Needs.  If you have any debts it may be sensible to pay these off immediately using your tax-free benefit. If you do this, you reduce the amount of income you need to cover your "Basic Needs".
Many people invest their tax-free benefit to secure an income after retirement. This together with the pension they buy with the taxable part of their retirement benefit will then form part of their total retirement income to meet their basic needs. This must meet your needs, unless you have other income.
 
 
Conclusion
 
Expressed another way you should try to structure your pension in a tax-efficient manner. What to do with any tax-free amount is a vital part of this tax-efficient structure. You should consult a financial advisor to advise you how to do this
Also see the Taxation section for more information on the tax payable.