Pay attention to the financial and emotional impact

By Deidré Valentine

31/8/2024

Many readers of this column have likely followed the Olympic Games to some extent this year. My husband and I quickly finished our chores after work so we could watch how the top athletes compete, hopefully winning a medal for themselves and their country. When the Games ended, I thought, “What am I going to do with my time now?” That’s probably how many retirees feel.

Retirement is a significant milestone in a person’s life, representing the transition from years of work, to a new chapter of relaxation and personal goals. Traditionally, retirement is associated with a sudden exit. Initially, escaping the daily routine might sound like a relief. However, many new retirees find that the novelty of being “on a permanent vacation” begins to wear off after a few months. You might miss the sense of identity, purpose, and structure that your job provided, as well as the social interactions with colleagues.

I recently met with a client who had planned to retire after a stressful and busy career. Retirement wasn’t exactly what he expected, so we had to explore alternative options, such as consultancy work, to soften the emotional and financial impact of retirement. Gradually making changes and taking the time to phase into retirement can significantly reduce this stress.

I want to make it clear that I wouldn’t recommend this approach without working with a wealth manager. Important factors like tax, portfolio composition, capital preservation, investment vehicles, and monthly budgeting are still crucial in retirement planning.

A systematic approach to retirement may offer benefits if applicable to the current situation. I understand that it’s not possible to work past 65 in all careers. If that’s the case, people should consider alternative income sources or careers before retiring.

I’d like to highlight a few advantages of a phased retirement:

Social Engagement

Workplaces often provide important social interaction and companionship. Suddenly leaving the workforce can lead to feelings of isolation and loneliness. By working fewer hours, you can maintain connections with colleagues. During this transition, you can build relationships outside of work and explore new social opportunities, which will help you maintain a fulfilling social life after retirement.

Financial Flexibility

Financial considerations play a crucial role in retirement planning. A gradual approach to retirement can provide better financial stability, as you continue earning a portion of your salary while transitioning into retirement. This gives you more time to build your retirement funds and allows your existing money to grow longer. Let me illustrate with an example:

Assume a 65-year-old wants to retire. We make the following assumptions about their assets and needs:

• R6 million in a pension fund (transferred to a living annuity at retirement)
• R6 million in discretionary unit trust investments
• A monthly withdrawal of R60,000 (before tax) from investments, of which 5.5% is withdrawn from the living annuity and the rest from the unit trusts
• Income increases annually with inflation (5.5%)
• Investment growth assumption is CPI + 5% (roughly 10.5%)

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This is in line with the expected average long-term return of a balanced portfolio. According to graphs below, it is clear that the person has enough money to meet their needs until age 95. The expected final value of the investments would be about R5.88 million (in real terms) by age 95.

Now assume we use the same assumptions as above but follow a phased retirement approach, where the person earns half their income through a salary from age 65 to 67 (and only withdraws R30,000 from investments). From age 67 to 70, they withdraw R45,000 (in real terms) from their investments, and after that, the full income requirement of R60,000 per month.

In this case, the final value of the investments would be about R10.98 million (in real terms) by age 95. This means the investor will have nearly twice as much money compared to the initial example above.

Health and well-being

A gradual retirement can also positively affect your health and well-being. Reducing work-related stress and responsibilities can lead to better physical and mental health. The extra time available during the transition can be dedicated to exercise, relaxation, and self-care, contributing to a healthier retirement lifestyle.

Retirement doesn’t have to be an all-or-nothing decision. A phased retirement offers a balanced approach to help you better manage this life transition. Gradual adjustments to your work schedule, financial planning, social connections, and personal activities allow you to tailor your retirement journey to your unique needs and goals.

Deidré Valentine is a certified financial planner at Woodland Wealth. Contact her at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.