Many retirees are cautious about investing, which is a reality the world over.

In the United States of America, the Transamerica 2021 Retirement Study reveals that retirees’ biggest fear is “outliving their money”. But it’s not just retirees who are fearful of outliving their money. According to the report, workers of all ages said that their worst fear about retirement is “outliving their money”. But being too conservative in retirement can be costly for retirees if they live long. Longevity risk remains a serious challenge for retirees, as with an ageing population locally and globally there is the likelihood of running out of money in retirement if pension income and savings and investments are not sufficient to take care of retirement needs. Many investors and workers underestimate how much money they will need in retirement.

Because no one knows for sure how long you will live in retirement, it is best to take steps early to avoid running out of money in retirement. If you are not yet at retirement age, there are steps you can take to avoid outliving your money. Longevity risks are also a concern for pension fund schemes as well as insurance companies. If life expectancy is underestimated, then they will have longer payouts of pension funds than planned. This can prove quite costly for defined-benefit pension schemes.

What can investors or workers do to avoid outliving their money in retirement? I find that there are employees and retirees who want to invest their funds, but have no clear goals for their investments or understand the right mix of investments that are suitable for their circumstances, goals, age, risk appetite, and risk tolerance. More employees are realising that retirement is their responsibility and not that of their employers.

Retirement can be a lonely place, so the transition into retirement needs to be planned. The financial planning journey has three distinct stages – accumulation, preservation, and distribution. Let’s examine them.

The accumulation stage: This is the growth stage of the investment journey. Savings and investments are important in this phase. It is best to automate savings and investments. Compound interest works wonders for the young investor. The longer funds are working for you the faster your funds will grow. Time and compound interest are key elements during every stage of the financial journey. Don’t forget to take care of emergency needs during the accumulation stage. Emergencies don’t have a timetable. They can happen at any time. I have seen individuals get excited about investing in stocks, especially when markets are booming, and the temptation becomes great to increase investments in the stock market while having no emergency funds in place. If you are investing in the equity/stock markets, think long term of 10 years or longer for best results. Markets can become volatile with severe downturns and without emergency funds, investors may sell shares or withdraw from the markets at the wrong time, absorbing a permanent loss on their investments.

Some investors may increase debts to meet emergency needs. This may not be the best option. Build up your emergency funds in a high-interest savings account and avoid the pitfall of increasing debt. The emergency account is your financial safety net. The accumulation stage allows you to build a solid foundation for your financial goals.

The preservation stage: Having built a solid financial foundation, this phase of the journey deals with preserving your investments. Preservation is not based on age but on protecting your investments from loss. It may mean rebalancing your portfolio of savings and investments by examining the assets mix and current market conditions or continuing with the existing investment strategy. Ensuring that there are sufficient short-term investments for emergencies and that long-term investments in stocks remain. Budgeting and spending should be managed carefully and wants and needs assessed prior to withdrawal considerations.

Distribution stage: In this phase retirement or other long-term goals are fast approaching. Having saved and invested for many years, it’s time to plan for the next phase of your life. The nest egg that has been built up after many years of investing will now provide income in retirement to replace the salary cheques. It’s time to pay yourself for the rest of your life. The size of your nest egg is dependent on how well you did during the foundation and preservation stages. A divestment strategy at this phase is important to create peace of mind and the confidence that no matter how long you live, your money should outlive you.

– Grace G McLean is a financial advisor and pension specialist at BPM Financial Limited. Contact her at gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com