Step 1 – understand your current financial position

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.

  • Find out what portion of your assets can be converted into cash, and what must be used to buy a pension (annuity) – this will depend on the type of retirement fund that you belong to.

Step 2 – determine your post retirement income needs

Draw up a budget that sets out your income and expenses.

Look at the budget tool

Next, prepare a list of the income you expect to get when you retire and your anticipated retirement 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.

Step 3 – put together a financial plan

Annuity’ is another word for the monthly pension you buy from an insurance company.

Your financial plan must cover:

  • How you will get the income you need at retirement.
  • How you will manage any risk factors.

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:

  • Living too long
  • Poor health and high medical expenses
  • Unanticipated expenses
  • The effects of inflation.

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:

  • Retire later
  • Take on part-time work
  • Rent out a room in your house
  • Make money from a hobby.

Step 4 – determine what you need to do now

You don’t need to wait for the day you retire before you secure your post-retirement income.

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.

Step 5 – review your income, goals and progress

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.