Adapting to a changing world is a fundamental
INVESTORS who understand their role in the financial planning process are far more likely to achieve positive outcomes. This has most recently been highlighted by the Financial Independence, Retire Early (FIRE) movement with its extreme focus on living frugally and curbing expenses with the ultimate aim of retiring early. This approach certainly encourages this behaviour, but its extreme focus on frugal living may not be for everyone.
The right plan is tailored to your needs
Your own vision of financial freedom might differ significantly from someone else’s, and as with all financial plans, the right plan is one that is tailored to your needs. Your plan also needs to be revisited as your circumstances change. The financial planning process can help you determine if changes are needed, or whether you should rather stick to the original plan – which is often the hardest thing to do.
As times change, be sure to shift your thinking
Our framework for being able to accumulate savings has changed. Most of us are no longer working for one employer during our working lifetimes, and ‘taking some time off’ (as a sabbatical, or when considering your next move) is becoming more common. This flexibility allows us to lead more rewarding lives – but we need to understand the potential impact this may have on our ability to accumulate savings. Preserving retirement savings when changing jobs is non-negotiable. If you take time off work, you will need to make it up elsewhere, either by saving more when you return to work, or by working for longer.
Improved health and longevity might mean you will be able to retire later. For every year you postpone retiring, you are not only not using your retirement savings to sustain you, but you also have a chance to continue accumulating more savings. Working for as long as possible therefore makes sense. Yet despite this, the age at which people are retiring hasn’t changed much over the last 100 years (still ranging between 55 and 65 years). According to a recent survey by Sanlam, if the average male reaches the age of 65, there is a 50% chance of him living to 85 and a 30% chance he will live to 91. Planning for the average outcome, however, may leave you falling far short of your actual needs.
Many mid- to higher-net-worth South Africans prefer to self-insure their retirement income in the form of living annuities, but if you choose to do so, you need to ensure that your income withdrawal level is sustainable. This means that you need to understand the impact that your drawdown rate is likely to have on the longevity of your capital. A qualified financial adviser can help you unpack what this means for your specific circumstances. Just because the SA equity market has been flat for the last five years, does not mean that you should give up on equities (and the potential they offer for long-term growth). Make sure your capital is invested to offer you an appropriate balance between growth assets and more conservative investments like cash.
If you are making your own investment decisions, invest time to ensure you are positioned to manage your own money effectively. Research has shown time and again that it is typically investor behaviour, and not the markets, that lets investors down. A financial adviser will be able to help you navigate your biases which, if left unchecked, can drive poor investment outcomes.
The value of good financial advice lies far beyond selecting a product or fund. Rather, it lies in providing perspective on the challenges you face, and in helping to temper the emotional reactions that destroy value. There are many challenges in dealing with a world characterised by longevity, and a good financial plan will help you meet them and reach your goals. – ww.fanews.co.za