If less than 10% of South Africans at 65 end up with sufficient capital to retire, then retirement is an illusion for the remaining for most of us. So what are the options?
Depend on your family
The problem is that families are under financial pressure to make ends meet and an extra dependent will add to the pressure. This is probably the last option you will want to take as all members of the family will have to make a financial sacrifice.
Depend on the state
Not much to look forward to from a state pension. The cost of living escalates at a far greater rate than the state pension increases every year.
Carry on working as long as your health permits This is the only real solution for many people. The ideal space to be in would be a business that you create for yourself by doing something that you are passionate about that generates an income which you can live off. You then rely on your health to keep going for as long as possible. If you are driven by passion then this could be longer than you think.
Don’t give in to the paradigm of 65…. Just because your pension fund made you retire at age 65 doesn’t mean that you have to adhere. If you are prepared to think outside of conventional thinking and plan and prepare in advance your life can begin at 65. Or even before it…There are many more years ahead that you have to cater for. It’s not only about the money but also about the reason or purpose you have to get out of bed in the morning for the rest of your life.
Retirement isn’t in the frame Getting set in your new found self, taking 65 out of the picture will give you the advantage of looking past retirement and into a new chapter in your life.
If you put your mind to it there are many possibilities. It will take courage and hard work which may be a far better result than struggling on a dwindling pension throughout your retirement.
The amazing performance of Bitcoin since 2010 has left many investors wishing they had got involved and others wandering if they should. The cyber currency has been nothing short of amazing as $1000 dollars invested in 2010 would have returned $90 million in 2017.
Here are 3 reasons why you should not get involved with Bitcoin.
If you don’t understand what Bitcoin is
It’s too easy to get lulled into an investment through hype and speculation taking a chance not clearly understanding what you are doing. Bitcoin is very technical and takes a lot to get your head around. As it is a very new concept it needs a lot of research before getting involved.
If you think Bitcoin will increase as it has in the past
The outstanding return in value has no guarantee of continuing following the principle that past performance is not an indicator of future. Sure there are many reasons given as to why it is a no brainer, however, you need to be astute enough to understand that markets do not go up in straight lines. As more cyber currencies launch (so far there are 876) the market will have more choice and Bitcoin’s dominance could diminish.
If you don’t have funds you can afford to lose
The risks are extremely high. You rely on the speculative bet that all the hype placed on Bitcoin will play out. It defies conventional thinking as there is no tangible asset. Just an amount in a wallet which moves up and down in value in cyberspace. The graph shows how these movements can swing in the short space of one week. So, if you are using must have money which you can ill afford to lose you are asking for trouble.
Whilst Bitcoin is less conventional, the conventional approach still applies. If it sounds too good to be true then it probably is. So be wary and do your home work and find out as much as you can before getting involved.
On its own advice is just advice and probably not that effective. Let’s consider a retirement annuity, for example. In isolation the product has many features and benefits which provide many reasons to invest
In one. A main advantage is the tax deductibility of the premiums from you taxable income.
So should every have one? Well, if you are young and just starting out in your working life, perhaps not yet. You see a retirement annuity cannot be accessed until age 55. If you need money for a deposit on your home or a car there is nothing you can do if your savings is in a retirement annuity fund. You may be better off saving in unit trusts which will give you accessibility to your money when you need it.
Good advice comes into its own when total provisions are considered, including pension and provident fund contributions. These place limits on the amount that can be deducted from retirement annuity contributions. Having carefully calculated the maximin deductibility would set up an appropriate contribution and any excess could be diverted to different investments making the overall provisions far more tax effective. You see, it’s not just a a product. It’s really about taking everything relevant into account and making a financial decision on your circumstances.
So good advice boils down to appropriateness. Advice that suites the situation. Different strokes for different folks. This can only be accomplished through a thorough and holistic evaluation. It is not about best but rather suitability.
Good advice is therefore not product focused. It is rather solution focused. Just like visiting a doctor you are taken through a medical evaluation which then leads to a diagnosis and then suitable treatment is prescribed. A competent financial advisor will take you through a financial planning process which will highlight opportunities which will form the basis of his recommendation. This is good advice. It is not premeditated. It is objective and appropriate.
Next time you are given advice be aware of the way the advice is delivered. If it is all about features and benefits, past performance and speculative opinions into the future then be careful.
A qualified financial planner is able to find appropriate solutions through a professional planning process. Make sure that your financial decisions are made through this approach.
In these tough times when households are under pressure to make ends meet, perhaps it time to have a closer look at loyalty programs to unlock some value to help get through.The more successful loyalty programs help you to change towards lifestyle behaviours which align to their business models and they reward you with useful benefits for doing so.
Here are some areas you should focus on with your loyalty program to ensure that you max out the benefits on offer.
Understand the program
Understand as much as you can about the program. What you have to do to get the most out of it. If you just, say, join it for a free gym contract, then you probably will miss out on a whole lot more.
There was probably a lot more to understand about the program in terms of its philosophy of say” wellness”. It probably would encourage you to eat well and focus on other areas like stress and metal health. The program probably also offers much more and the more instant the rewards the more gratifying it will be. So, getting to understand the program completely will obviously unlock a lot more value.
Are the values real?
As a premium member on one of my loyalty programs I have diligently kept up the required behaviours towards a healthier lifestyle. The rewards, in the main, are real and immediate with discounts on healthy food and retail items. However, when booking an air ticket recently, I realised that my 35% discount was applied to the “rack rate”. This ended up being no cheaper than similar air tickets available on the “Travel Start” website. So this reward had no real value. Check out the actual value of what is promised and try not to be lulled into perceived values.
Commit fully to the program
You will do better with fewer programs. You should align your goals with the program. If the program sets out to encourage you to improve your health, help you to drive better or manage your money more efficiently then you should commit fully. By so doing, you will enjoy most of the rewards on offer and improve your lifestyle at the same time. Dabbling in the program won’t unlock much in rewards and will just end up being a cost to you in membership fees.
Short term solution in the current environment
As our economy is technically in a recession investment options are very challenging. A great place to invest in the short term is the money market. Accounts can be opened at all financial institutions such as your local bank. Why?
Well because it is very difficult at the moment to get a return of around 7% with extremely low risk of losing your capital. I say low risk because there is a very extreme possibility that the bank where your investment is made could run into trouble as did in the case of Africa Bank.
What is it all about?
A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, bills of exchange which all trade in a period of less than a year.
The money market trades at the so called ‘interbank’ level where banks lend and borrow to each other. These wholesale rates are higher than the retail rates offer by banks on their savings accounts.
Money markets do better when interest rates rise
The current rate varies between as the underlying instruments reach their varying maturing rates. These instruments are also dependent on the interest rate cycle. As interest rates rise so too will money market rates.
Make sure you understand the actual rate offered
The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.
Nominal rate of 7% per annum yields and effective 8.25% over a 5 year period.
If you draw out the interest then you do not get the effective rate. You actually get the nominal rate.
Real rate is the adjusted rate received after subtracting the inflation rate.
In an environment where cash is king money market accounts are very useful parking bays.
Don’t forget dependents Whilst you are alive you take into account all that you own and deduct all that you owe. You then embark on a financial journey to own more and owe less. If you die, however, you need to also include a provision for your income which your dependents rely upon.
The sum total is the essential amount of life assurance that you will need to have in place in the event of your death.
Whilst you are alive you should then aim to payoff the things that you owe and then build up a nest egg that you and your dependents can live off into the future.
Life assurance is the a way to provide for dying too soon before you have had the time to accumulate enough pay off debt and leave behind enough to support your dependents.
The way forward So it stands to reason that you need to take snap shot of where you are right now in relation to your debt and your monthly lifestyle needs.
You then put in place a life assurance policy to cover yourself in the first instance.
You then embark on a dedicated financial journey to wean yourself off the dependency of the life assurance policy. The more your worth improves the less life cover you will need.
Aim to accumulate enough while you are living which is what financial independence is all about. Work on being less dependent on life assurance.
The most powerful tool in the financial world is that of compounding. It is a phenomenon which even amazed Albert Einstein who was said to call it the 8th Wonder of the World.
So what is it all about?
Essentially compounding is reinvesting the returns you make on an investment back into the investment.
You invest R500 in a unit trust fund which makes 10% in a year amounting to R50. Buying more units in the investment for the R50 starts the next year with R550. The following year the same 10% return is now made on a larger amount and the result at the end of the year is now R55. By reinvesting the 3rd year starts with R605 which returns R60,50 at the end of the year.
Consistent positive returns
So the way to maximise your savings is to save for the longest time possible in investments that consistently give high positive returns and then reinvest these back into the investments, creating the magical compounding effect over the period.
Time is needed
The longer you save the greater the effect. The same R500 in our example got to R605 over 3 years. If you continued over 10 years you get to R100 728 and over 20 years R361 993.
Be mindful of inflation
You need to beat inflation. The value of money into the future depreciates against the rise of the cost of living. This is called inflation. To keep the value of your investment real you need to achieve returns above the inflation rate. So, investments that achieve more than 6% (which is the current rate) will compound over time to provide real value which improves your wealth.
Endowments are policy contracts which commit you to a minimum investment period of 5 years after which the proceeds are tax free. They basically provide a so called “wrapper” around various funds of choice which may be invested in various assets, such as, equities, property, bonds and cash. The returns from these assets (other than equities) are taxed inside the endowment at a flat rate of 30%.
Dividends from equities – 20%
Rental income from property – 30%
Interest from bonds – 30%
Interest from cash – 30%
REASON 1 – Tax rate lower than 30%
The first reason why you should not have an endowment is that if your tax rate is less than 30% you will pay more than you should to SARS. You would be better off investing in the same funds directly without the endowment wrapper.
REASON 2 – No cash fund in place
The restrictive period of 5 years ties your money up and if you need to access cash before hand then you could be penalised. A sound financial plan starts with cash fund which you can access for unforeseen expenses. The ideal balance in this account should cover your monthly expenses for between 3 to 6 months. If you don’t have access to enough cash for emergencies then you should not have an endowment.
REASON 3 – Debt not under control
If you have high interest bearing debts such as credit cards, personal loans, overdrafts and mortgage bonds then these should be tackled before investing in an endowment. The returns after tax, costs and fees from the funds in the endowment are unlikely to achieve the same rate as your credit card, for example, 22%. Paying off your debt is a sure thing, without risk of losing capital, effectively providing a guaranteed return at the rate the interest is being charged. Therefore, the third reason you should not invest in an endowment is if your debt isn’t under control.
Gold has always been a storage of wealth. The lustre of gold has attracted investors for centuries. Over the best part of the last decade, however, it seems to have lost its shine. Peaking at levels just under $1800 and ounce a few years ago in 2012 to around $1100 of in 2014. The big question is, “Will it be the safe haven when investors take flight from the stock market and look for what has traditionally been their storage of wealth?
There are some very good reasons to consider gold as part of your portfolio.
The ups…….. There seems to be upside on gold. It is has turned the corner from its low to levels in the upper $1200’s presently. This points to a latent appetite for the precious metal as investors are not being compensated for the high prices they are paying for their shares relative to the returns received.
Rand hedge on offer…….
The rand value of gold improves if our currency weakens. So if you are concerned about our rand sliding further into the abyss with all the political and economic problems we are facing then you will certainly benefit. If the dollar price of gold moves upward and the rand weakens then the rand value will certainly be worthwhile.
The rand tends to surprise. Just when you think it is on a path to nowhere, it turns a corner just like of late when it strengthened from R17,00 to the dollar breaking into the range of R12,00. The recent political events leading to our downgrade weakened the rand back to levels of R13,50. Somewhat surprising, as one would have expected it to free fall much further. This again shows how unpredictable our currency is.
No compounding……. Gold on its own does not provide a yield. Therefore, there is no opportunity for compounding returns into the future which is how the growth on your investment is enhanced. If you buy gold in the form of coins or exchange traded funds, then you rely entirely on the price movement and the currency differential. So it boils down to the rand price of gold over time. You can buy gold shares, however, but then you need the mine to make a profit before it pays you a dividend. There are some unit trusts which invest in gold shares and the yield, if any, in these portfolios can be reinvested and compounded.
Do your homework and take a longer view with gold. It does look attractive at the current levels given the aversion to risk which is taking place in the markets coupled with the downgrade and the possible weakening of the rand over time.
The recent political debacle which triggered a downgrade of South Africa has pushed our economic prospects into the dark. Whilst we try to fathom out where we are heading we anxiously await the outcomes of the Rand, Inflation, rising interest rates and low GDP.
It is far easier to change your sails before a storm than during one. We left to our country’s downgrade far too late.
Don’t make the same mistake with your personal finances. You should be well ahead in your ability to service your debt even in the face of a sharp rise in interest.
Essentially, ratings agencies assess countries ability to service and repay their loans. This provides investors and lenders with assessments of the associated risks in dealing with that country. Your personal money lenders do the same thing. They stringently assess your ability to afford your debt using key factors which provide a credit rating.
Start with your personal credit rating which you can get for free from various online credit bureaus.
Update your personal balance sheet and quantify your debts taking a hard look at your exposure to debt.
How easy can your income cover the cost of the debt, is the important question? Talking into account a sharp rise in interest rates.
Work on having more disposable income by living well under your means. Buying a home or car which you can comfortably afford leaves more money behind each month. It is here where you will find the money to build up your savings and cash reserves.
Reducing your dependency on debt and increasing your savings will improve your credit rating and avoid a personal downgrade.