Retirement planning and life stages
Retirement and your financial plan
A comprehensive financial plan is based on the pillars of:
The accumulation of wealth through savings and investments
The protection of wealth through medical and risk insurance
The preservation of wealth by means of estate planning
The consumption of wealth during retirement and investments
Retirement planning impacts both the wealth creation and wealth consumption elements of financial planning. Therefore, retirement planning is only part of a broader financial landscape and should not be done in isolation of the other financial planning elements.
Funding your retirement
There are various means to create the wealth needed to retire financially independent.
The main sources of retirement savings include:
Employer pension schemes
Investment income and growth
(i.e. dividends, rental income, interest and capital gains)
The prominence of these sources of income will differ based on your life stage. As you progress through life, your ability to generate wealth should increase as your ability to access these sources of funding broadens. It is important to note, however, that retirement savings should not be limited to a single source. Additional personal retirement savings are critical to ensuring a financially independent retirement.
The following factors determine how you will convert retirement savings into the necessary funding for your retirement years:
The amount of money that you are able to save as a percentage of your total income
The time period over which you are able to invest your savings
The rate of return at which you are able to grow your investments
Individuals experience various life stages defined by their economic activity. There are four distinct phases during which you are more or less economically active.
Your formative years are characterised by the development of your personal and educational profile in creating the basis of your future economic contributions. During your formative years you are a net consumer of wealth.
Energy years represent the first stage of your active working life during which you establish your career, family and financial commitments. It is during this phase of your life that the base is set for the wealth creation element of your financial plan.
The consolidation years represent the latter part of your working life during which you reach the peak of your economic activity and wealth creation ability. This is the phase during which you start the process of consolidating your financial affairs as you prepare for retirement.
When entering retirement, your economic activity starts to decline, resulting in the shift of your financial dependence on the investment capital built up during your active working life. In this phase, most individuals become net consumers of their wealth. The key challenge in this phase is to make retirement capital last for as long as possible.
Phases of retirement planning
While there are four distinct life stages for financial planning purposes, retirement planning focuses on two broad elements pre-retirement and in-retirement. The focus for pre-retirement planning involves the creation of wealth with the objective of accumulating sufficient capital for financial independence at retirement. The investment strategy must be designed around the objective of achieving capital growth.
Moving into retirement demands a shift in focus, as you will start consuming your wealth during this phase. The investment strategy for the retirement phase must allow for the protection of your capital base through stability and continued growth to counter inflation and the drawdown of capital as a result of income taken.