Last week’s article on whether one should consider a fixed annuity as a retirement plan elicited quite the response, with one of the readers asking for further clarity on whether he should consider an annuity or invest in property for his retirement.
Every time I have training for members of pension schemes preceding their retirement (retirement planning training), this question often arises.
Surprisingly, as we continue with the training, the need for financial security in their retirement life becomes more evident, and the retirees are able to draw a conclusion on what is better for them as they leave active service.
So today, we tackle the question: What is the most effective way to plan for retirement to optimise the retirement income?
Effective retirement planning should be a journey and not an event. This should begin from the very day a person is employed or has a steady stream of income. From this point, one can paint a picture of what their retirement life should look like.
I often joke about this in my training to retiring members of pension schemes by asking them to draw a picture of their youthful, active days and juxtapose the image with their current state.
This often elicits discussions on what is best to consider for retirement: a monthly pension, commonly referred to as an annuity, or an investment in property.
There have been varied views on whether one should consider taking home a lump sum pension payment, as is the case for Provident schemes, or better, convert the pension to a monthly income (annuity).
I like drawing cases from my village, where most of the senior citizens are ex-employees of companies that either used to have gratuity arrangements, had no pension schemes at all or had provident schemes, and retirees would resort to commuting the entire benefits as cash lump sum.
Most of them purchased land, while some purchased motor vehicles using their retirement benefits. While the investments helped them sustain their lifestyle, they were short-lived.
The need for machinery maintenance and failure to develop land later led them to sell the property for cash.
The need for cash in retirement is crucial, as most studies have shown.
Studies in the pension industry have gone ahead to list some of the critical areas that are pressing, hence making it almost mandatory to have pension arrangements that generate periodic payments in place for a comfortable life in retirement. I will explore a few here.
Medical needs
You see, one of the lessons we have all learned is that at the end of our service, our bodies, just like machinery, do wear and tear, and therefore need continued repair and maintenance.
With age, our bodies are exposed to many factors that make them susceptible to illnesses, and since medical expenses have spiralled in our country, it makes it necessary to have ready cash to cater for medical expenses like to buy drugs, attend clinics and so forth. Therefore, this underscores the need for liquidity.
Food expenses
One cannot overemphasise the fact that food is a costly affair. Recent studies have indicated that most homes spend 55 percent of their income on food.
This could be higher for the senior citizens as they are guided on diet-specific foods, most of which are costly. The differentiated food could also be due to health reasons.
This basic and very important need will undoubtedly require ready cash for purchase.
School fees expenses
The modern-day man and woman first must chase career, and later settle on matters family or marriage. There may be a different school of thought to this, but for today, let us look at the former.
With “late” family arrangements/marriage, one often ends up retiring having school going children, and their kicks in school fees expenses. We all know how expensive education has become, and the importance of exposing one’s children to better education.
Miscellaneous expenses
We all live in a society where one man’s problem is a societal problem, and we have to be there for one another, either during good times like weddings and graduations or bad times like funerals and hospital bills.
It is a norm that when one retires from work, all one needs is social capital to “live well with other people.”
As such, one will need cash to sustain this.
Now, from the above list, one can tell the place of a regular income and its importance.
An annuity, with its salient features of predictability and regularity, one can easily plan their finances, as they are certain of the amount they receive, giving them the ability to meet their cash needs.
This is not to say that investment is entirely a bad venture in retirement. One needs to evaluate their liquidity needs and strike a balance.
Investment experts have advised that as one advance in age or nears retirement, they should try as much as possible to move their investments in easy-to-liquidate assets, as opposed to assets that take time to liquidate.
The choice is yours, and I hope you make a good one for yourself. Afterall cash is king in retirement life due to its dynamics.
The writer is a retirement coach and can be reached via [email protected]
