What can a pensioner do in times of crisis?
The last two years have brought about a crisis for many pensioners. Some have braved the storm and others have panicked and made poor choices with their investments. We look at some of the dos and don’ts when it comes to a crisis.
By Martin de Kock (CFP®)
Every day we are bombarded with financial risks and demands resulting in a variety of crises, from economic impacts like record high petrol prices to potentially life-threatening diseases such as the current Covid-19 pandemic. With volatile investment markets, expectations of increased taxes and possibly less income in the near future, pensioners are at serious risk.
However, there are many rules that everyone should follow whenever there is a financial crisis, even with a pensioner’s limited ability to later correct a poor decision. It is always best to take action straight away and not wait for the crisis to subside.
Most people who are on the cusp of retirement will often find that they have not saved enough while earning a salary. In order to retire with 75% of your last salary, you need to contribute 17% of your salary annually for 40 years. Chances are that you are already short of capital or suspect you will be in the future. Here are some rules to improve your savings, especially in times of crisis.
Act immediately. Don’t wait until disaster strikes. If possible, be proactive and secure your financial future now. Plan for two budgets where one is to see what you spend in a year and one that extends into the future. The two budgets should cover both income and anticipated expenses, considering inflation rates, healthcare bills and transport expenses.
Now is also the time to check the structure of your pension by possibly converting a living annuity into a hybrid annuity, which has a guaranteed annuity as part of the structure. The advantage of guaranteed annuities is the ability to offer a guaranteed income, which is not susceptible to the investment threats of a living annuity. The income improves the older you are at inception when you invest in a guaranteed annuity.
Research indicates that the majority of guaranteed annuities sold by brokers are flat-rate annuities. This means the monthly income stays the same every year and does not keep up with inflation. The main reason for this is that the initial monthly income on a flat rate guaranteed annuity is considerably higher than that of a guaranteed annuity where the monthly income escalates annually. Don’t be tempted by the allure of a higher initial monthly income that does not grow annually. This decision will come back to bite you a few years later.
Consider the risks to your pension, particularly risks such as a serious disease like dementia. You should also not discount scams, since pensioners are often targeted by criminals.
Finally, try to avoid reducing your medical aid option or cancelling your medical aid. Retirement is generally the time when the greatest demands are likely to be for health cover and using this saving to free up money for living expenses could end up being very costly.
This article first appeared on moneyweb.co.za at https://www.moneyweb.co.za/financial-advisor-views/what-can-a-pensioner-do-in-times-of-crisis/
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