WHAT A FINANCIAL PLANNER CAN DO FOR YOU
An expert takes three readers through the planning process
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 firstname.lastname@example.org.
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.
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