Monthly Archives: July 2016

Track with your retirement savings

There are many issues one has to consider before retirement, such as: How much debt do I have now and will I have any remaining at retirement? Are my kids still at school and will any of them need financial assistance when I am retired?

The most compelling question for a retiree is however: Am I going to be able to afford to live a comfortable lifestyle off the pension amount I receive?

Situations are different for every one of us, which is why it is very important to sit down with a financial advisor well ahead of retirement age. This will allow the necessary time to determine if your income will be enough in context of the potential expenses you may incur during your retirement years. Expenses may include items such as groceries, medical aid, rent or bond and fuel or transport money.

When a client asks me if they have saved enough for retirement I can only give a comprehensive answer if I have the following information: their current income and expenditure, and their contribution rate towards their pension fund and/or retirement annuity.

In addition, I need to know their planned retirement age, marital status and number of dependants. I also have to have an in-depth discussion about the type of lifestyle they envisage having in retirement.

I then use all this information to inform our discussion around possible annuity choices, as this also feeds into whether the level of savings will be adequate. There are different ways to structure your income in retirement, and these come at different costs.

Based on the information the reader has provided, it’s impossible to say whether, in his personal case, he is on track. I would rather advise him to sit down with an adviser who would have the appropriate financial analysis tools at their disposal to come up with a comprehensive analysis. They would be able to calculate, based on his current level of savings and projected retirement age, whether he could retire with an adequate amount of savings.

Following that discussion, the reader could then take some remedial action if it’s needed. That could be in the form of additional contributions to his retirement annuity, increasing his savings period by planning to retire later, or by revising his expenditure.

It’s never too late to take action. What’s important is making informed decisions about what you need to do.

Limited retirement capital

images-57I would highly recommend that this reader engages the services of a recognised professional financial planner. The information provided here leaves many more questions than answers, so advice is difficult.

The individual has a residence which she rents at R3 000 per month. She has R400 000 from which she needs to generate the rental income.

Sadly R3 000 per month represents R36 000 per year, which requires an income yield of 9%. This may be possible by purchasing SA Retail Bonds, which are currently offering 9.25% on a two year fix, but this would leave her very exposed to inflation. That means that if her rental escalates she will be required to spend capital. Given that she is currently only 68, the need to invest with a longer term outlook to beat or match inflation is critical.

Investing in another property may be an alternative, but the illiquid nature of this asset plus the tenant risk she highlights may offset the benefit of an escalating rental. In addition maintenance and repairs also have to be factored in.

Another alternative is a listed property or real estate investment trust (REIT) unit trust or exchange-traded fund (ETF). These funds would invest in listed property stocks on the JSE that generate income yield and also have the potential for capital growth.

The downside here, however, is that while the tenant mix is more diverse, commercially-orientated and subject to increases in rental income, the daily volatility of a property fund due to share price movements may leave the investor very uncomfortable from a risk perspective.

As for a fixed deposit, while there may have been some negative press around a number of our banking institutions, I am doubtful that the big banks are in any form of a crisis. They are well funded and run and it is unlikely we will see one of them fail in the near future.

However, even though she may be able to get a fixed deposit that offers the required 9% interest, she will have the same inflation problem that a retail bond presented. Her income will not increase even though her rental probably will.

I see two other options that may or may not be viable:

The first is to generate further income. The possibility of generating additional income from employment may allow for less income to be drawn from the investment and then the possibility of investing in a more growth-oriented portfolio.

The second is to consider engaging with her family around generational wealth planning. While this is often avoided at all costs by retirees, the reality is that it often only delays the inevitable. It may be possible to merge her situation with what succeeding generation’s lack. Parents lack cash flow and children lack capital. By planning together, there may be scope for both parties to benefit in the longer term. Sitting down a with a financial planner who can help you to come up with a potential solution around this proposal is essential.

Beyond these options, there are unfortuantely no ‘silver bullet’ options for retirees who have not prepared adequately. Their stories should however serve as an incentive to younger generations to start saving more, earlier!

Financial education for beginner

Six months after launching, the highly popular Wealthy Ever After financial education course is moving into the corporate market, having delivered 9 000 hours of content to users.

Co-developed by JSE-listed media group Moneyweb and The Money School, Wealthy Ever After is an online financial education course aimed at empowering people to take control of their finances. Used in conjunction with webinars and on-site education sessions, it forms a part of a powerful education tool.

“This course represents a major investment for Moneyweb and it is pleasing to see the take-up of the product by both individuals and corporates,” says Moneyweb Managing Director Marc Ashton. He adds: “Lack of financial education leads to poor money habits and this has a proven negative impact on productivity inside businesses and a direct impact on the bottom line.”

The challenging economic conditions add an extra layer of challenges into the mix, as staff grapple with rising interest rates, a higher cost of living and lower expected investment returns from property and equities.

“As employers begin to see the effects of the macroeconomic conditions filtering down into both the personal and professional lives of their employees, we’re seeing almost daily requests for training and assistance from corporates,” says Money School co-founder Hayley Parry.

“We’ve definitely seen an increase in enquiries within the past two months – including from companies that know that they’re not going to be able to provide employees with increases, or whose employees will be facing retrenchment within the next six months to a year.”

While the tough economy means that many businesses will be tightening their belts, financial education has a proven direct impact on the workforce and should not be ignored.

According to the 2015 PwC Employee Financial Wellness Survey:

  • 35% of ‘Generation Y’ employees find it difficult to meet household expenses on time each month
  • 30% find it difficult to make their minimum payments on their credit cards
  • Less than half (43%) are confident they will be able to retire when they want to

Gary Kayle, Money School co-founder says: “As money coaches, we know that there are many external factors which employers and employees cannot control when it comes to money. But what they can do – is help employees translate their hard work and effort into debt elimination and wealth building activities. That is something that is within their control and there has never been a better time for employers to showcase that they care about their staff’s financial wellbeing.

“You only have to see the testimonials and feedback we receive to understand the massively empowering impact that this has on staff morale and productivity.”