Draw up a balance sheet setting out your assets and liabilities. Under ‘assets’, include your house if you own one, your car, retirement savings, other investments like unit trusts and any savings you have. Under ‘liabilities’, list any debts you owe including your bond, store or credit card debts.
The difference between your assets and your liabilities is what you could use to live off (more about that later).
For now, your first priority is to settle all debts.
Draw up a budget that sets out your income and expenses.
Download the AF Online Excel budget template
Next, prepare a list of the income you expect to get when you retire and your anticipated expenses. Break this down further into essential and ‘nice to have’ expenses because you might have to decide what ‘nice to haves’ you can cut back on, if necessary.
Your financial plan must cover:
By now you have a good idea of what level of income you will need when you retire, and what assets you have to get that income.
The next thing you need to think about is where you will invest your retirement savings. Investing yourself is not the best option because of the risks involved. Buying a pension (annuity) is a more sensible option.
An annuity is a contract that you buy from an insurance company. They then pay you a regular income – similar to a salary – for the rest of your life (depending on the type of annuity you buy).
Choose an annuity that will give you the income you need. Think about the risks that could affect your financial well-being in your retirement years, including:
Visit our Annuity Selection Guide for more information and guidance on the different types of annuities. You can get quotes for the annuity you prefer from different service providers through a qualified financial planner.
If no annuities will give you the income you need, go back to step 2 and look at the ‘nice to have’ expenses that you can cut. You might even have to look at what assets you could sell. For example, you might have to sell your house and buy a smaller house.
If you still can’t get the income you need, think about your options. You could:
If you’ve chosen the type of annuity you would like to buy when you retire, you should (if you can) choose a retirement fund investment portfolio that matches that annuity type or minimises the risks associated with that annuity type.
For example, if you plan to buy a fixed-interest annuity, you may want to consider switching to a more conservative investment strategy as you approach retirement. This will reduce the risk of a market correction just before your retirement.
If you plan to buy a living annuity and to leave your savings invested in a market-related portfolio, it would make sense not to switch to a more conservative portfolio before retirement because you will probably just switch back into the market when you retire.
If you need to find other sources of income, you can build up the necessary skills now or speak to potential employers.
No matter how good your plan is, circumstances always change. You need to review your plan regularly to see if it is still appropriate and if you are still on track to achieve your goals. You should also review whether your retirement goals are still appropriate – your income needs might have changed.
The most important step to take to meet your retirement income needs is to speak to a qualified financial planner to help you with your retirement plan as soon as possible.