WHAT A FI­NAN­CIAL PLAN­NER CAN DO FOR YOU

An expert takes three read­ers through the plan­ning process

Fairlady - - CONTENTS - By Anna Rich

Q: Is it re­ally nec­es­sary to see a fi­nan­cial plan­ner?

A: If you have a mi­nor health is­sue like a headache, you go to the chemist who gives you a pill. But if you break your leg or have a sud­den sear­ing pain in your chest, you don’t go to the chemist – you go to your doc­tor.

Sim­i­larly, if you’re plan­ning a hol­i­day next year, you’ll just put money away in a sav­ings ac­count. But when it comes to some­thing that’s go­ing to make a crit­i­cal im­pact on your life, like whether you’ll be fi­nan­cially se­cure in re­tire­ment, then you need to see a ‘doc­tor’ – a Cer­ti­fied Fi­nan­cial Plan­ner®. The cer­ti­fi­ca­tion is peace of mind for you: it means the plan­ner has com­mit­ted to the Fi­nan­cial Plan­ning In­sti­tute (FPI) of South­ern Africa’s eth­i­cal and pro­fes­sional stan­dards, and meets their stan­dards of skill, com­pe­tence and ex­pe­ri­ence.

Q: Isn’t the ad­vice pretty stan­dard: don’t spend more than you earn; save for your re­tire­ment?

A: Many peo­ple think: ‘I know what my ex­penses are, I should be okay to look af­ter my own re­tire­ment.’ But do you un­der­stand the tax and liq­uid­ity im­pli­ca­tions of what you’re do­ing? When you re­tire, do you un­der­stand what you should do with your re­tire­ment fund?

There’s no one-size-fits-all. For in­stance, if you’re not con­tribut­ing to a re­tire­ment fund, I’ll point out the nice tax de­duc­tions, and ex­plain how re­tire­ment con­tri­bu­tions make up for poor fi­nan­cial dis­ci­pline – you can’t touch the fund un­til you re­tire. Even then, you can’t ac­cess two-thirds of it as that’s what pro­vides you with an in­come. Some­one else might be hit­ting 50 and their re­tire­ment fund might not be grow­ing suf­fi­ciently. That dis­cus­sion would be about the un­der­ly­ing in­vest­ments; they may need to be more ag­gres­sive to in­crease growth.

It was clear none of the read­ers I’d met had a fi­nan­cial plan. What’s great about this process is that they now have fi­nan­cial goals and guide­lines.

Q: How do you find the right per­son to help you?

A: Peo­ple don’t eas­ily talk about money. So you have to trust your fi­nan­cial plan­ner, and trust must be earned.

Many peo­ple mis­trust the fi­nan­cial ser­vices in­dus­try, be­liev­ing it just sells them prod­ucts. For the past 40 years, many rep­re­sen­ta­tives have been do­ing ex­actly that, not putting clients’ in­ter­ests first. But things are chang­ing. Treat­ing Cus­tomers Fairly, which is the ap­proach the fi­nan­cial ser­vices in­dus­try should have been fol­low­ing any­way, is be­ing leg­is­lated.

Ask a friend for a re­fer­ral, or con­tact the FPI to find a Cer­ti­fied Fi­nan­cial Plan­ner near you: www.let­s­plan.co.za, 086 1000 FPI (374) or fpi@fpi.co.za.

MY FI­NAN­CIAL GOALS AND CHAL­LENGES

1 I’d like a com­fort­able re­tire­ment. 2 To be able to af­ford a re­li­able car ev­ery five years. 3 A hol­i­day ev­ery sec­ond year. 4 My mom and I are look­ing for the best way to trans­fer our fam­ily as­sets to my daugh­ters.

BRUCE’S WARN­ING SIGNS • NO FI­NAN­CIAL PLAN

Jane doesn’t have a plan that takes into ac­count her goals – go­ing on hol­i­day (short term), re­plac­ing her car (medium term) and main­tain­ing her life­style in re­tire­ment (long term). She knows what she wants, but not whether what she’s do­ing at the mo­ment will sup­port it.

• SHE CAN’T AC­CESS HER MONEY QUICKLY

Jane’s in­vest­ments are weighted in prop­erty, which is illiq­uid – she isn’t able to ac­cess cash in an emer­gency. Un­for­tu­nately, the prop­erty is jointly owned with her ex-hus­band, so it’s even more illiq­uid. He’d have to agree to sell the prop­erty or buy her out. A bet­ter op­tion at the time of her di­vorce would have been a clean break – the di­vi­sion of as­sets so there’s no obli­ga­tion from ei­ther party go­ing for­ward – but it’s not al­ways vi­able.

Her re­tire­ment fund is her ma­jor in­vest­ment, which is also illiq­uid. Other than that, she has a very small re­tire­ment an­nu­ity. Jane should in­vest ex­tra funds in a di­ver­si­fied port­fo­lio, us­ing plat­forms that are more liq­uid. A bank sav­ings ac­count is the most liq­uid ve­hi­cle be­cause you can ac­cess money when you need it, but in­ter­est is low. Unit trusts earn bet­ter and of­fer a di­ver­si­fied port­fo­lio, but it takes up to five work­ing days to ac­cess the funds. Per­haps a com­bi­na­tion of the two will cover her bases.

• SHE DOESN’T HAVE ENOUGH FOR RE­TIRE­MENT

If you don’t have enough money by 65 to re­tire com­fort­ably, you could re­tire later. But Jane’s re­tire­ment date is fixed. She could con­tinue to work in an­other sphere af­ter re­tire­ment, but it’s dif­fi­cult to find em­ploy­ment at that age. Jane could also sell the prop­erty she co-owns. There will be cap­i­tal gains tax im­pli­ca­tions but we’d weigh that against her need for greater liq­uid­ity in re­tire­ment. • HER PROP­ERTY IN­VEST­MENT HAS A LOW YIELD

Jane’s prop­erty pro­vides a rental in­come, but af­ter all the as­so­ci­ated costs in­volved – like the agents tak­ing a per­cent­age of that in­come, and rates

and taxes – she’s get­ting a very low yield. In­vest­ments in shares could pro­vide her with a bet­ter re­turn.

OTHER IS­SUES

We dis­cussed whether a trust for her chil­dren would be a good idea. Trusts can be­come ex­pen­sive – they have to be au­dited once a year, and at least one trus­tee has to be in­de­pen­dent and has to be paid. Jane doesn’t have suf­fi­cient as­sets to jus­tify set­ting one up.

JANE’S EX­PE­RI­ENCE OF THE FI­NAN­CIAL PLAN­NING PROCESS

I be­lieved if I con­trib­uted to a pen­sion fund ev­ery month, paid off my bond and stayed out of debt, my fi­nan­cial goals would take care of them­selves. Bruce made me re­alise that you need a plan. He helped me un­pack terms like eq­uity and en­dow­ments, fi­nan­cial ve­hi­cles into which I can put money.

The big­gest wake-up call was that my prop­erty might not be the best ve­hi­cle for my money. With our down­grade to junk sta­tus, I’m fear­ful of sell­ing my prop­erty and in­vest­ing in shares in­stead. What if my money loses value? With the prop­erty, I’d feel more se­cure. But the mar­kets move up and down, so I have to think long term. That fi­nan­cial ed­u­ca­tion was im­por­tant, and Bruce pro­vided that.

MY FI­NAN­CIAL GOALS AND CHAL­LENGES

1 I don’t want to lose half my life’s sav­ings and as­sets to my hus­band.

‘I re­tire in 13 years’ time – will I be com­fort­able?’

JANE* is 52, sin­gle and has two adult daugh­ters. She works as a lec­turer and her 85-year-old mother lives with her. ‘I don’t want to lose out fi­nan­cially in my di­vorce’

MIRIAM* is 38, in the process of di­vorc­ing her hus­band and has a three-year-old daugh­ter. She works in busi­ness de­vel­op­ment.

2 Af­ter the di­vorce, I’d like to bud­get prop­erly to en­sure I have money at the end of each month to save.

3 I’d like to take my daugh­ter to the UK to see fam­ily mem­bers and, as she grows older, to take her on an ad­ven­ture each year.

4 I’d like to buy an­other prop­erty that has po­ten­tial for good cap­i­tal ap­pre­ci­a­tion, and rental in­come, that will be paid off by the time I re­tire.

5 By age 65 max, I want to have the means to re­tire com­fort­ably.

BRUCE’S WARN­ING SIGNS • A BRICKS-AND-MOR­TAR FO­CUS

As I dis­cussed with Jane, prop­erty is illiq­uid – you can’t nec­es­sar­ily sell it quickly. Miriam’s long-term think­ing is for rental in­come, but ten­ants can bring all sorts of prob­lems – they might de­fault on their rent or cause dam­age. I call this the bricks-and­mor­tar is­sue: peo­ple like prop­erty be­cause they can touch and see it. In con­trast, you can’t see an in­vest­ment in shares or unit trusts.

• FAR­AWAY FAM­ILY

Liq­uid­ity in re­tire­ment be­comes more im­por­tant when you have fam­ily abroad who you’d like to visit.

• TOO MANY UN­KNOWNS

Miriam is at a cross­roads. For­tu­nately, what’s hers is hers, and what’s his is his. How­ever, she earns more than her hus­band, so she might have to pay him main­te­nance. On the other hand, she ben­e­fits from her hus­band’s med­i­cal aid, for ex­am­ple, the loss of which will have a ma­jor im­pact on her fi­nances. We’ll be able to as­sess where we’re go­ing only af­ter the di­vorce set­tle­ment.

MIRIAM’S EX­PE­RI­ENCE OF THE FI­NAN­CIAL PLAN­NING PROCESS

There are two com­po­nents to the process: one is the pa­per­work. It took me sev­eral evenings to get all the pa­per­work to­gether. But it was hugely help­ful – es­pe­cially the bud­get­ing. It made me re­alise just how much money I’m spend­ing. And it scared me! The sec­ond is what’s come out of my con­ver­sa­tions with Bruce. He’s easy to talk to; he’s open and help­ful. I like that he sees this as an on­go­ing in­ter­ac­tion rather than a one-off.

MY FI­NAN­CIAL GOALS AND CHAL­LENGES

1 To play catch-up with my re­tire­ment fund. My house and car are paid up, and my kids are on their way to tak­ing care of them­selves – so I need to fo­cus on mak­ing sure I don’t de­pend on them later!

BRUCE’S WARN­ING SIGNS • NO SPE­CIFIC TAR­GET

The big ques­tion for Meneesha is: how much is enough? She doesn’t know what that fig­ure for re­tire­ment is, which is caus­ing anx­i­ety. I’ve ex­cluded ex­penses like pen­sion con­tri­bu­tions and ed­u­ca­tion, which Meneesha will no longer in­cur once she’s re­tired, leav­ing her with the pre­cise fig­ure she needs each month to main­tain her cur­rent life­style. Then we calculated how much she’ll need for re­tire­ment. Her avail­able cap­i­tal will gen­er­ate an in­come un­til she’s 71, but af­ter that she’ll have to start dig­ging into it.

She’s in­creased her re­tire­ment con­tri­bu­tions to the max­i­mum of 27.5%, and has some money left af­ter cov­er­ing ex­penses. She should in­vest this in a dis­cre­tionary (or non-re­tire­ment) fund that tar­gets a re­turn of 5-7% above in­fla­tion – it’s im­por­tant to look for re­turns above in­fla­tion and to in­vest for as long a term as pos­si­ble to in­crease the chances of pos­i­tive growth. We need to make sure Meneesha is com­fort­able with the level of risk she takes on. If she could work for five years be­yond the re­tire­ment age (at her com­pany) of 60, her out­look im­proves a great deal.

• IN­SUF­FI­CIENT ILL­NESS AND DIS­ABIL­ITY IN­SUR­ANCE

Even with a good fi­nan­cial plan in place, an un­ex­pected turn of events could de­rail it. Other than af­fect­ing your abil­ity to earn an in­come, an ill­ness or dis­abil­ity could mean you need spe­cialised care. Meneesha has cover for dis­abil­ity and se­vere ill­ness, but it isn’t enough.

• NEI­THER SHE NOR HER HUS­BAND HAS A WILL

I’m con­cerned that Meneesha has no ac­tive will. If she dies in­tes­tate, the es­tate will be gov­erned by in­tes­tate leg­is­la­tion, which can lead to ex­tra costs, and a sig­nif­i­cant ad­min­is­tra­tive bur­den for her fam­ily. With the help of a fi­nan­cial plan­ner, the es­tate can be struc­tured to be as tax-ef­fi­cient as pos­si­ble, and to make sure it’s liq­uid enough to cover all the ad­min­is­tra­tion costs, ex­ecu­tor’s fees, es­tate duty and any li­a­bil­i­ties.

MENEESHA’S EX­PE­RI­ENCE OF THE FI­NAN­CIAL PLAN­NING PROCESS

I had to force my­self to fill in all those forms! But I got a good (or bad!) pic­ture of where my money goes.

I cashed in my pen­sion when I left my first job; the next em­ployer didn’t have a pen­sion scheme, and I didn’t get round to sort­ing it out. For­tu­nately, my cur­rent em­ployer does, but un­til re­cently I didn’t con­trib­ute as much as I could have. So I’ve been wor­ried about not hav­ing enough saved for my re­tire­ment. But things could be worse; I now know what I need to aim for and what it will take to get there. It was also good to have the other gaps pointed out. I hadn’t given them much thought at all. I feel a lot calmer about my fi­nances.

‘I don’t have enough saved for my re­tire­ment’

MENEESHA* is 46 and works in pub­lic re­la­tions. She’s mar­ried with two chil­dren who are al­most in­de­pen­dent.

Cer­ti­fied Fi­nan­cial Plan­ner and cur­rent FPI Fi­nan­cial Plan­ner of the Year Bruce Flem­ing

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