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GEORGE BUSINESS NEWS - Having your money tied up in illiquid assets such as property can be a fatal financial mistake which could derail your carefully laid retirement plans.

Entering your retirement phase asset rich but cash poor may mean that you will need to draw more from your retirement fund for income, thereby putting your future income at risk. You might also be forced to sell assets – such as your family home – in order to maintain your income at an acceptable level.

The solution to ensuring that your retirement plan is on track is therefore to differentiate between lifestyle assets such as your home and car, and investment assets which can provide income to support you and your family.

To illustrate, consider the example of Steve, who earns R50 000 each month and is approaching his retirement. Steve owns a home valued at R4 million, household effects amounting to R500 000, and an expensive car, also worth R500 000.  In terms of investment assets, he has a further R5 million saved in his retirement fund. If we assume that Steve is debt free, this means that his total assets would amount to a princely R10 million.

However, Steve does not wish to draw down more than 5% from his retirement fund for income in his first year of retirement in order to avoid eroding his capital base. This means that he would only have 5% of R5 million (not the R10 million total asset base) as his income, which equates to R250 000 a year or just R21 000 per month – less than half of his pre-retirement salary.

To boost his retirement income, Steve would either need to work on building up his discretionary or non-retirement savings, consider taking a larger lump sum than the tax-free R500 000 allowed at retirement, or potentially sell his home and car and downsize both in order to boost his investible assets.

While this example has been simplified, it is nevertheless important to remember that the financial consequences of your retirement decisions can be complex, especially when factoring in tax implications. It’s consequently vital to consult a trusted financial advisor who would be capable of guiding you carefully through the decision making process to arrive at an optimal choice. For a comfortable and relaxed retirement, you want to ensure you have enough liquidity to fuel your lifestyle requirements.

Article by Citadel.

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