In retirement ‘realised’ income is the money you draw out of your capital. If you can manage your finances more efficiently you could reduce that so-called ‘realised’ income without compromising your lifestyle, and you will be more financially secure.
There are two areas that you can look at:
How much do you spend?
Firstly look at your expenses. Many stop, some drop, some stay the same and a handful go up when you retire. Here are some expenses that may drop after retirement:
- Firstly your debt – you should ideally settle any outstanding debt as you enter retirement
- Education – the children have hopefully left home
- Clothing costs
- The house is usually fully furnished – few new items have to be bought
- Pension fund contributions and other forms of retirement savings stop seeing as though you are retired
- Many policies mature
- Taxes are lower.
Here are some expenses which may increase after retirement:
- Recreation … you have more time
- You may travel more
- You may spend more on security
- Medical costs tend to increase.
The key is not so much what you spend it on, but how much you spend.
What tax are you liable for?
You should also look at tax.
Fred is 60 and retired. His lifestyle costs R15 000 per month. If he draws all of his income from a living annuity it would be a fully taxable income and he would have to draw approximately R17 400 (rounded) before tax to be left with R15 000 after tax.
If he was able to supplement his living annuity income with more tax efficient income discretionary (non-retirement) investment vehicles then he may be able to reduce his monthly ‘realised’ income before tax and still get R15 000 after tax.
When he turns 65 his tax breaks would increase and he could readjust the balance between income that he gets form the living annuity and discretionary investments. He should get skilled financial planning advice for this.