How to plan your retirement cash flow for financial security

Determining your income needs is essential to a financially secure retirement. Underestimating your expenses could lead to cash flow shortfalls, while overestimating could unnecessarily limit your lifestyle.

Establish a realistic baseline: while general guidelines suggest your retirement income should be between 70% and 80% of your pre-retirement earnings, be aware that individual factors such as debt, savings rates, and insurance costs can significantly influence this figure. Carefully analyse your current spending habits and desired lifestyle to create a practical budget for retirement.

Deduct current investment contributions: upon retirement, you'll transition from contributing to your investments to drawing from them. With this in mind, remember to exclude your current retirement contributions from your projected retirement expenses. This adjustment can substantially affect your retirement budget, especially if you start investing later in life.

Eliminate debt obligations: ideally, aim to be debt-free by retirement. Home loans, vehicle payments, and credit card repayments should ideally be settled to reduce financial pressure. Develop a debt reduction strategy that is tax-efficient yet preserves sufficient discretionary funds to comfortably meet your retirement expenses.

Review and revise your insurance coverage: 

Retirement offers an opportunity to reassess your insurance needs. With debts settled, you may be able to reduce life insurance cover. Before doing so, ensure that you have sufficient liquidity in your estate to cover your estate costs and provide for your loved ones. Also note that disability benefits typically fall away at age 60 or 65, potentially lowering premiums. Maintaining dread disease or severe illness cover is advisable as medical risks typically rise with age.

Anticipate rising healthcare costs: 

Medical expenses typically outstrip consumer inflation by around 4% per year. Factor in annual medical aid contribution increases and possible upgrades from hospital plans to comprehensive cover. Check if your employer-provided medical aid subsidy continues post-retirement. Additionally, the budget for healthcare items is not fully covered by medical aid, such as hearing aids or medical appliances.

Account for age-related premium hike: Gap cover and vehicle insurance premiums usually increase with age due to higher perceived risks. Gap cover, in particular, may significantly rise after age 65. Incorporate these higher costs into your retirement budget planning to avoid surprises.

Seek out pensioner discounts: Take advantage of available pensioner discounts to reduce expenses. Property rate rebates and discounted memberships at clubs, gyms, retail stores, and restaurants can significantly lower your retirement budget. These discounts are often under-advertised, so proactively inquire about them.

Evaluate retirement accommodation carefully: Bear in mind that downscaling your accommodation doesn't automatically reduce costs. Thoroughly research retirement home or village costs, including deposits, levies, meals, additional services, club memberships, and life rights resale conditions, to ensure affordability.

Adjust for lifestyle shifts: Your retirement lifestyle will influence your budget significantly. Expenses such as clothing, commuting, and convenience meals may decrease, while hobbies, entertainment, and travel could increase. Clearly define your retirement goals to ensure these lifestyle choices are financially supported.

Prepare for significant capital expenses: Irregular, sizable expenses like weddings for your children, home or vehicle upgrades, international travel, or medical appliances need dedicated planning. Ensure your discretionary retirement savings are adequate to comfortably cover these significant costs.

Budget realistically for long-term healthcare: Long-term healthcare is one of the most challenging expenses to predict. Frail care assisted living, or private nursing, can incur substantial costs, potentially placing heavy burdens on loved ones. Budget conservatively by researching facility costs and ensuring you have sufficient provisions for comprehensive care in your retirement plan.

* Odendaal is an associate financial planner at Crue Invest.

PERSONAL FINANCE