# Calculate carefully before taking early retirement

Early retirement forced on one by retrenchment is a traumatic choice that many employees are having to face.

Early retirement forced on one by retrenchment is a traumatic choice that many employees are having to face.

We are living in trying economic times and as companies look to downsize, retirement age might no longer be so much a matter of personal choice as before.

Those considering early retirement must examine their post-retirement costs carefully.

Retirees underestimate what costs will be because many existing expenses, such as medical aid and life cover previously included under membership of your retirement fund, entertainment or running your car will have to be paid for by yourself.

Since every company will offer a different early retirement or retrenchment package, it is difficult to make hard and fast rules about which is the best alternative. But it is important to know what features of the offer need to be closely examined.

Most employers are members of what is termed a defined contribution fund.

The three components of this type of fund are employee's contribution, employer's contribution and growth that has accrued in the fund.

Legislation states that on leaving a fund members will get their full share of their fund.

Medical aid considerations have an enormous effect on post-retirement costs because most claims made on a medical aid are from people in postretirement years.

The value of other perks to be calculated into the formula include a housing bond, company car and entertainment allowance.

Few people scrutinise these costs and most think they have hit the jackpot when they get their lump-sum payment. But if they do not get another job five years down the line, they will have little left when spending and inflation have eroded their capital base.

To understand what inflation does to the cost of living I will try and explain using the Rule of 72.

If you take the number 72 and divide it by the rate of inflation, the corresponding answer will alert you to how quickly the buying power will half (72/8 percent inflation= 9).

This means that in 9 years what costs you R1000 a month today will cost R2000 a month or you will only be able to buy half of what you buy today.

I have worked with many employees who have been put on early retirement and after all the calculations are done, most people understand that it is imperative to go out immediately and look for other income opportunities.

While the lump-sum might seem large, with inflation it will probably not provide the required income for both spouses because people are living so much longer.

The old way of children supporting parents is changing because they themselves find it difficult to make ends meet.

So, it is critical that all the relevant factors are considered very carefully when calculations are made before taking early retirement.

l The writer is a director of Pioneer Financial Planning. Visit www.pioneer.co.za or e-mail help@pioneer.co.za

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