How to end up with the right retirement income: Part 1: An overview of life-staging

In this first of a series of articles, Prudential Investment Managers takes a broad look at life-staging as one of the more common ways to approach your retirement planning

Life-staging is an interesting concept. It’s based on the idea that as you get older and move through different stages of your life, your financial needs and investment objectives tend to change. You don’t need to look very hard to find a range of investments that have been designed to cater for every possible stage of your life. Trying to navigate your way through all these options can be confusing, which is why it may be a good idea to take a few steps back and look at life staging in its most basic form: life before retirement and life after retirement.

Life before retirement
From a financial planning perspective, life before retirement is commonly referred to as the build-up phase. Probably the most important aspect of the build-up phase involves saving enough money to fund your retirement. Over the next few months we’ll unpack this topic in greater detail, but for now it’s sufficient to know that contributing as much as possible for as long as possible towards retirement should be high on your agenda.

The early stages of the build-up phase generally involve the accumulation of assets. This often coincides with salary increases and life-changing events, such as buying a home, getting married or having kids. The trick is to ensure that the large assets that you accumulate contribute positively towards your retirement in some way.

This brings us to the latter stages of the build-up phase, which involve the slowing down of purchasing assets and the acceleration of paying off debt. Retiring with little to no debt can have a tremendous impact on your retirement income.

Life after retirement
Life after retirement is largely about making sure that your retirement savings lasts the distance. This means working wisely with your money to ensure that you can draw an income for the remainder of your life.

It’s useful to look at your gross (before-tax) income at retirement as a percentage of your gross income directly before retirement. This is commonly referred to as your income replacement ratio. Logic suggests that if you want to maintain your lifestyle after retirement, your income replacement ratio would need to be at (or close to) 100% of your pre-retirement income. While this makes sense in theory, the good news is that you may need less to maintain your standard of living.

To illustrate this, the below example looks at Joe, who recently turned 65 and is now ready to retire. He currently earns a gross annual income of R500,000, of which he contributes 15% towards a retirement fund. He uses 27% of his gross income to pay off debt, which he will need to reduce when he retires. He plans to draw a gross income of R375,000 in retirement and his goal is to retire with the same amount of discretionary income as he had before retirement.

By reducing his debt and expenses by 19%, from R135, 540 to R109,377, Joe is effectively able to draw a lower income after retirement while still maintaining his standard of living. This is partly due to him being taxed at a lower rate and receiving a higher age rebate for being 65 years old. Worth mentioning is that Joe will receive a further age rebate upon turning 75 (currently at R23,373).

Reducing your debt and drawing a lower income after retirement allows your money to last longer. However, this is only part of the key to success - it’s equally important for your money to continue to grow while in retirement. Choosing the right asset allocation is key when it comes to your investment growth. Look out for our upcoming articles over the next few months, or contact our Client Services team on 0860 105 775 or at info@prudential.co.za for more information about this and other tips on retirement planning.