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 retirement 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.
The investment horizon is never really certain. However, the current global economic climate is definitely more uncertain than before. Economies throughout the world are battling to create employment and dig themselves out of the debt. Doubt, fear and worry loom. Yet the markets are performing at all time highs pointing to hope and expectations which, frankly, do not align with what’s really happening out there.This all adds to further uncertainty.
So how should you approach your investments in these times?
Time in the market
Firstly, you need to decide on how long you intend to invest for. The basic principle being that the longer your horizon the more risk you can afford to take. Risk is found in the share markets where historically you receive higher returns than the other asset classes. Shares are bought in expectation of profits made by companies which are passed onto the investor in the form of dividends. If companies make consistently high profits over time then investors are prepared to pay more for the shares. However, there is a problem. The share market is driven by emotion and speculation in the short term and this often defies the fundamental view. Case in point, the current economic condition of our planet and the all time high performance of our stock markets.
Once you have your time horizon established then you should consider your options. Look at a balanced fund approach. Take two or three unit trust funds that offer a flexible balanced objective. These fund managers make the calls for you deciding on where and how much to allocate to various options. If you choose a few funds then you get the advantage of different styles and choices from different points of view. That’s a lot of attention on your money.
Rand cost averaging
Investing a lump sum in the markets in times like these is very risky as you have a strong possibility of loosing capital. If you lose 50% of your money you need 100% to get back to even. Who knows what the new normal returns will be into the future? It could take years to break even.
A safer way is to spread your investment into your new funds over time. The longer the period the less risk. Choose to keep your money in cash and then phase in over 6 to 12 months to avoid any severe loss of capital. If the markets correct during your phase in then you can take a position with the remaining balance at a discount. If you save on a monthly basis then you benefit from a bearish falling market which, if sustained for a long period, will mean that you will be buying discounted shares for a while and benefiting when the valuations pick up again.
It’s all about preparation and patience in the end. Phase into your well chosen funds over a period of time and then be patient as you spend time in the market.
A word of caution. Don’t be lulled into the expectations of your investment based on the past two years. Be realistic, understanding that there is a long way to go before the world gets back to normality and the returns in the new normal will probably be more benign than the performances of the past.
There are basically 2 types of pensions to consider:
The Life Annuity
This is a structured pension based on the amount of money you have accumulated and your life expectancy. The product provider will offer you a pension for the rest of your life. Should you die sooner than estimated then the balance of your pension capital goes to the pool. You can take out a guarantee on your pension for a period. The longer the period the lessor the pension. If, for example, you choose 10 years, then the pension will be lower, but should you die, say in year 8, then the remaining 2 years of pension will be paid to you nominated beneficiary.
Shop around and compare rates as they vary from company to company.
The Living Annuity
This pension allows you to invest into a wide choice of funds. You decide on your pension by making a choice between 2,5% and 17,5% of the value of your fund. When you die the investment passes onto your beneficiaries. The big risk is drawing down a pension at a higher rate than the investment performance. If you achieve, say, a 10% return and draw down a 12% pension, then you effectively are eating into your capital which will result in your pension drying up a lot sooner. You need to monitor your living annuity carefully, constantly assessing the returns and the percentage drawn down.
If you are convinced that you will live longer than the average, a life annuity is probably the better consideration. The guarantees on the pension need to be studied and understood before committing. Ultimately, the life annuity provides certainty for your retirement around which you can plan more effectively. However, you essentially give the assurance company your money and compete with the statistics of life expectancy.
If you want control of your pension and are prepared to keep involved with the investment during your retirement years, then the living annuity is your better option. The pension drawn should be carefully considered along with the funds chosen. Be realistic about your expectations of returns taking costs into account as it is the net value that matters.
Depending on your total provisions available at retirement you could consider a combination of these options. A useful tool to help you get a better understanding of the dynamic can be found at www.marriot.co.za.
Your choice of pension is a very important financial decision to make and you should seek advice from a professional financial planner to help you find the appropriate solution.