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Why a Retirement Annuity is a good idea - Money mavericks Rate this post With the myriad of investment vehicles available to the investor, it can be a real challenge to choose one that is right for you. When our Grand Parents were growing up there were relatively few choices; a fixed deposit bank account, a company pension plan, endowments and the stock ma...

How you should invest in uncertain times

The last three years have been challenging for South African investors, as the stock market delivered largely flat returns, and political and economic uncertainty has made investors skittish about committing to longer-term investments. Yet, with a
well-diversified portfolio, the proper asset allocation and a longer-term framework, it is still possible to receive inflation beating returns
"Liberty"

Thank you to my wonderful team at TAU 9....you all add to our success and service

This makes financial planning rewarding. I love working with clients who have an understanding of the service we offer.

The word “retirement” is often thought of as something we only need to be worried about later on in life, but the years fly by so quickly that, for many people, it may come as a shock when you realise you’re only five years away from retirement.

A successful retirement plan is developed on the basis of extensive budgeting and balancing of assets and expenditures, and you need to start planning the details of your retirement at least five years before retirement. A Financial Adviser may be key to help you put financial goals in place in order to meet your retirement requirements.

Here are a few pointers to help guide you in your pursuit of financial freedom during your retirement:

Calculate your expected living expenses: Outlining a budget allows you to identify and align monthly expenditure with your current income. This is the starting point for forecasting how much income you need in retirement. A budget will also separate necessary living expenses from luxury spending. When we assist our clients with budgeting, we also take inflation into account, helping us to determine the cost of living at retirement.

Build in medical costs: Retirement is not cheap – it’s been said that we incur over 80% of medical expenses in a lifetime after retirement, so adequate medical scheme cover is essential. If you’re not already on a fully comprehensive scheme, you need to factor this cost into your retirement expenses.

Settle your debts: Ideally, we want to enter retirement free of debt. You will need your retirement income to cover your living expenses, not interest.

Boost retirement savings: With recent legislation changes, you can now invest up to 27,5% of your income and enjoy a tax benefit in doing so. Most people find that they have under-saved for retirement, so this provides the opportunity to boost your retirement funding. Use any salary increases in the last five years to boost your retirement fund, rather than your lifestyle.

Re-assess your risk cover: Risk cover is intended to protect you by covering any income gaps to pay for any outstanding debts and provide for your family should you no longer be able to. By retirement, ideally you’ve built up sufficient capital to provide an income, so this portion of risk cover is less important and is only needed for estate planning reasons, such as settling taxes and paying for funeral expenses. However, you should increase your critical illness cover as the likelihood of becoming seriously ill increases substantially as we age.

Understand your investment options: When you formally retire, the financial vehicle used at this point will typically be in the form of annuities. Annuities refer to investments that provide a monthly, semi-annual, or annual income. Your decision about whether to purchase a guaranteed annuity income or invest in a living annuity with an underlying investment portfolio will determine how to manage your current retirement funds. Do you need to start moving to more cash-like investments over the next five years or do you stay invested in equities?

Upon retirement, you’ll be able to take a portion of your retirement funds tax-free. You need to decide how to invest this. This can be used to generate additional income, tax-free, if allocated in the correct form of investment.

Women should take advice that speaks to their needs
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Personal Finance / 06 Aug '16, 07:25am
Laura du Preez
Women don’t need financial information in pink folders or their financial adviser to wear a skirt, but they are increasingly taking more financial decisions and need sound advice from a trusted source on how best to manage their money.
Heidi Dreyer, head of corporate sales at Prudential Investment Managers, told a recent Women in Finance network breakfast in Cape Town that women form the biggest emerging market in the world and advisers need to adapt to serve them.

Women are controlling more and more of the world’s wealth. This is not only because more women are working and often becoming the main earners in their households, but because a growing proportion of legacy wealth is being left to women thanks to longevity and shifting demographics.
Dreyer says women are no different to men in needing to be educated about financial matters or requiring competent and professional advice from an adviser who understands their needs, but she does tell advisers that you, as a female client, are likely to be a little different from the traditional male client, and advisers should be prepared for that.
Many women want to, and should be encouraged to, ask more questions about financial matters, she says. Women generally will not invest in something that they don’t understand.
If your adviser is not prepared to answer all your questions to your satisfaction, you should look for one who does, because advisers will increasingly have to adapt to serve women.
Dreyer says surveys of women consumers consistently show that women worry a lot more than men. “It is in our DNA, part of the nurturing instinct,” she says.
However, by educating yourself or taking advice, you can overcome your concerns and balance the risks of investing with the rewards, she says. And a good financial adviser will help you to overcome these fears and concerns, instead of preying on them.
Research shows that women tend to take less investment risk than men, as they tend to keep a lower proportion of their money in higher-growth assets such as equities.
But it is very important for women to take appropriate investment risk when investing, because they typically live six to eight years longer than men and retire, on average, with two-thirds less than men as a result of earning less and taking career breaks to raise children.
Equity has long proved to be the best place for long-term investors to put their money.
Tracy Jensen, the chief product architect of 10X Investments, says the average life expectancy of a 65-year old South African woman is now 85.9 years, more than four years longer than the average man.
Jensen says people often mistakenly believe that investing in high-equity portfolios always entails greater risk, but they forget that over time, the risk of investing in equities decreases.
She says that the range of real (after-inflation) returns of each five-year period between 1900 and 2013 show that a low-equity multi-asset fund (with less than 40 percent equities) would have given a return of between minus 13 percent and 14 percent, while a high-equity fund (between 60 and 75 percent in equities) would have low returns of minus 14 percent but positive returns of as much as 26 percent.
“This means, for the long-term investor, a high-equity portfolio actually has the same or less risk than a low-equity portfolio, but double the upside potential,” Jensen says.
Dreyer says women are typically more cost-conscious than men, because they are used to running the household budget. Being cost-conscious about your investments means looking for transparent investment options that meet your financial needs, she says.
Each percentage point of fees, charged as a percentage of your assets, that you can save, adds up to 30 percent more money at retirement over a 40-year savings period, Jensen says.
Longer lives, on average, mean women need larger retirement savings than men, and for this reason it is important that women start saving as early as possible.
Starting early will give you more of the benefit of compounding returns, which will mitigate the effects of earning less and taking time off during child-rearing years.
Yolande Botha, a finalist in this year’s Financial Planner of the Year Awards, says women who follow financial advice when they are young are much better off than those who get advice only when they are older.
A practice like Galileo Capital charges about R20 000 to draw up a comprehensive financial plan. But Botha says that if you do not have the money for a financial plan and your finances are relatively simple, many practices will find a way to assist you. She says Galileo has set up a robo-adviser to help younger clients with uncomplicated financial affairs to set up their first investments. The practice will need an hour-long consultation with you (costing about R1 500) to give you initial advice and point you in the right direction, and will then enable you to help yourself through its robo-adviser.
WIVES MUST GET INVOLVED
If a man takes a leading role in a couple’s financial affairs and consults an adviser, the adviser should insist that the woman also takes part in the consultation, women in the financial services industry suggest.
As a wife, you are likely to outlive your spouse. For the sake of yourself and your children, you should get to know and trust an adviser and be involved in financial decisions, even if your husband feels that the finances are his responsibility.
A good adviser should encourage a male client to bring his wife or partner to at least one meeting a year, Heidi Dreyer, the head of corporate sales at Prudential Investment Managers, says. It’s too late to get to know your adviser after your spouse’s death. Plans need to be in place and the relationship established to alleviate some of the stress when a spouse dies.
Financial planner Yolande Botha says the wives of men who try to control them by not allowing them to take part in financial decisions do not learn how to manage money, yet one day they may be alone and have to do so.
A good adviser will open the discussion with a couple on issues that the woman may be afraid to raise in front of her husband, such as what would happen to her should he die, or should they get divorced.
Botha says that when you get married, you should decide which partner will be the main caregiver if you have children. Whoever it is – usually the woman – will give up some of his or her earning potential, and should be compensated in the event of divorce. The caregiver will most likely also be the one looking after the children after a divorce. The couple’s ante-nuptial contract should therefore reflect that the primary caregiver gets a bigger percentage – for example, 65 percent – of the assets on divorce, she says.
If this is not written into your ante-nuptial contract, the two of you should save more for the partner looking after the children, Botha says.
If you stay married, you do not have to worry about income when your partner dies. The tax burden is spread over two people, which may allow for a lower overall tax rate.
FACTS AND FIGURES
Women currently control 27 percent of the world total wealth (created wealth, inherited wealth or spouse’s wealth that they manage) and by 2028 will control 75 percent of all discretionary spending worldwide, Heidi Dreyer, the head of corporate sales at Prudential Investment Managers, told a recent Women in Finance network breakfast in Cape Town.
Already in South Africa, women control more than 50 percent of discretionary spending, she says.
Dreyer says men born between 1945 and 1964, known as baby boomers, are the first generation to have accumulated significant amounts of wealth, and this wealth will be transferred typically to their spouses and then on to their children in what will be the biggest inter-generational transfer of wealth.
Dreyer says that data from the United States shows that, on average, men still earn more than women, but in the 20-to-29 year age group, women are out-earning their male counterparts by 20 percent in major metropolitan areas such as New York, Los Angeles, Chicago, Boston, Dallas and Minneapolis.
It is expected that, in the US, by 2028 the average earnings of women will exceed that of men.
The number of women graduating with college degrees overtook the number of men graduating with degrees in 1981 and it is projected that by 2021 US colleges will produce 148 women graduates for every 100 men graduates, Dreyer says. In at least 12 other countries including Australia, Germany, France, Britain, Finland, Spain and Canada, women graduates have surpassed the number of men graduates.
The trends in education and earnings that have emerged in the US over the past 30 to 40 years will happen in developing markets at a much faster pace, Dreyer says.
Today’s young women are entering the labour force at higher rates and education levels than any generation before them, she says.

Saving is putting money aside for future use – or spending postponed – whereas investing is what you do with money to earn a return.
This is the view of Steven Nathan, the chief executive of 10X Investments, who says that these different activities are two sides of the same coin, and that it’s important that you do both.
“When you save money for future use, you put money aside with a goal in mind: that may be your annual holiday, your child’s university education in five years’ time, or your retirement, still 30 years away,” Nathan explains. Your objective is to preserve money.
When you invest, your objective is to earn a return – which is to grow your money, he says.
If you hide your spare cash in a drawer, you are saving, not investing. Left alone, that money will not grow in amount or in value; it will lose value.
The constant rise in the cost of living – known as inflation – steadily eats away at the purchasing power of your money. Depositing your money in the bank should at least preserve its purchasing power, but in such a savings vehicle your money won’t grow sufficiently to provide for your retirement, which is why you need to invest in assets that deliver a high real (after-inflation) return over time. A tried and tested way of doing this is in higher-risk assets such as shares, which may prove volatile over the short term, but deliver inflation-beating returns over longer periods.
This is an important message for people who are good savers but poor investors.
Financial planner Natasja Hart says she has come across such people, who have “saved themselves poor” – meaning that they have failed to invest. “I’ve seen it with older people who tend to derive comfort from having easy access to their money in the bank.” But left in the bank, their money has hardly grown and they have lost the opportunity for gains to compound over time.
Nathan says that when you save your money as cash in the bank, the risk is generally very low. “You therefore earn a return that, over long periods, exceeds the inflation rate by only one percent a year. But you can be almost 100-percent sure that when you draw your money, you will receive all that you put in plus any interest that is due to you.”
Share prices, on the other hand, move daily. “You are thus never sure how much money you will receive for your shares until the day you sell them. However, to compensate for this uncertainty, you are likely to earn a real return of six to seven percent a year from a well-diversified share portfolio that is held for many years.”
But how will real growth of six percent a year fund your retirement, you may ask. Nathan says that it works through the phenomenon called compounding.
“Say you deposit the price of a loaf of bread today into an investment account that grows at five percent a year in real terms (six percent a year, net of an annual fee of one percent). After 15 years, your investment should pay for two loaves of bread and after 40 years seven loaves.”
This is the effect of compounding, or earning a return on your return. The longer you invest, the stronger the compounding effect becomes.
Nathan says that the key lesson here is that you should start investing as early as possible, to benefit from the strong compounding effect by the end of a long investment term.
“If you invest your money in the bank, earning a real return of one percent a year, you will be able to buy only a loaf-and-a-half in 45 years’ time. In other words, even if you invest diligently over your entire working life, investing in a low-risk asset class could curtail your standard of living in retirement. That is a much bigger risk than exposing your money to the share market over the long-term,” Nathan says.
He says there tends to be an over-emphasis on saving, when we should be considering long-term returns.
We’re repeatedly told that South Africans are a nation of spenders, not savers. Yet a significant number of South Africans are saving by way of regular contributions to retirement funds, unit trusts and stokvels, Nathan says.
Almost 11 million people in South Africa contribute to a retirement fund and these funds have assets worth about R4 trillion. And about 11.5 million South Africans belong to one or more of the 810 000-odd stokvels, which are custodians of an estimated R49 billion. The number of savers excludes the unknown number of investors in the local unit trust industry, which is worth about R2 trillion.
“Stokvels are an interesting phenomenon – there’s one in our office. A bunch of people put in R200 a month, and every month someone gets R2 400. It’s a good mechanism for disciplined saving towards a short-term goal. The loyalty is high and the peer pressure is there to stop anyone from missing a payment.
“But a rand in a stokvel is always worth a rand. You want a rand to be worth more – and that’s the difference between saving and investing. But you need time on your side,” Nathan says.
Alexander Forsyth-Thompson, the head of stokvel investments at Investment Solutions, says stokvels that accumulate money in cash or in the bank have a real opportunity to put this money to better use.
“Investment and burial stokvels are accumulating large sums of money that are severely diminished by inflation when left in cash or the bank,” he says. If groups such as these (only four percent of stokvels are “investment” stokvels) put their money into the right investments, members may have seen their money double, triple or quadruple over longer periods of time, he says.
IT ALL BEGINS WITH A BUDGET
A budget is the cornerstone of your financial plan, and the decisions you make daily determine your financial destiny, says Natasja Hart, an award-winning financial planner and the wealth manager at GCI Wealth.
You need to budget to save and invest, Hart says. “Saving and investing amount to paying yourself first, but people don’t think of it that way. When I ask clients what the first line item on their budget is, most people say ‘bond repayments’.”
Although a home is an investment, she suggests to her clients that they put saving for a short-term goal, or a small saving as a reward for budgeting, as the first expense on their budget. “It’s psychological: if you don’t pay yourself first, you can feel negative about your budget,” she says.
Hart tells of how she helped a client overcome her negativity about budgeting. “My client felt very overwhelmed by her financial situation when she came to see me for the first time. She felt particularly guilty about what she spends on coffee every day. She didn’t want to give up her daily coffee, so we made it the number one item on her budget and made it her reward to herself for sticking to the budget. I knew she was going to spend that money anyway, and there was no point in her feeling guilty about it,” Hart says. What was more important was that she had a budget and stuck to it.
DEFERRED SPENDING CAN SAVE YOU A FORTUNE
Say the word “save” and increasingly the conversation turns to debt. South Africans can’t save because they’re drowning in debt. But what if we sought to save ourselves from the cost of credit.
If you considered saving as “spending postponed” and got into the habit of saving for what you wanted rather than incurring debt, you could save a great deal.
By living within your means, you are saving, because of the high cost of credit, says Natasja Hart, a financial planner at GCI Wealth.
For example, buying a TV for R6990 on credit over 36 months, will cost you R12 157 in total over the term. Almost 80 percent of that will go to repaying the capital plus interest at 21 percent a year. The rest, about R2 700, will cover costs, such as a R100 fee to initiate the loan and a monthly administration fee of R57, and credit life insurance.
If you put away R338 a month (the average monthly instalment, including all costs, of buying the TV on credit) to save up for the TV, you could buy it cash in just under two years (23 months), assuming you earn interest of 5.5 percent a year on your savings and the price of the TV went up by 6.5 percent a year, to R7 928.
By deferring your spending and saving up for the TV, you would save yourself R4 229 (R12 157 minus R7 928).
If, after paying for the item in cash, you carry on saving the R338 a month to end of the 36-month term, you will have the added bonus of about R4 500 in savings to put into an emergency fund or to invest.
Steven Nathan, the chief executive of 10X Investments, says wealth is not what you spend, it’s what you keep. “When my children have referred to other people as ‘richer’ than us, I say to them: ‘We don’t know that; what we do know is that they spend more than we do.’ In South Africa, we need to develop a culture of living below our means.”
YOUR HOME LOAN IS GOOD DEBT
Not all debt is bad and some is unavoidable. Credit to finance an asset that appreciates in value, such as a home, is “good debt”.
Very few people can pay cash for a property. The vast majority of us have no option but to obtain a home loan. But in order to qualify for one, you need to put down a deposit. The bigger the deposit, the better positioned you are to negotiate with the credit provider for a low interest rate.
According to a press release issued by estate agency RE/MAX this week, in June, the average first-time buyer put down a 20-percent deposit. Considering the average purchase price was about R860 000, that equates to a deposit of about R182 000.
Adrian Goslett, the regional director and chief executive of RE/MAX of Southern Africa, says banks are asking applicants for between 10 and 30 percent of the property’s asking price to qualify for finance.
This can be daunting for any buyer, especially a first-time buyer.
Goslett says the best way to accomplish big goals is by starting small and remaining consistent. “Mountains are climbed by taking one step after another. Even if it is a matter of starting out setting aside small initial amounts, just get started – the sooner, the better.”
He says the best way to set a monthly savings goal is to find the difference between your current rental payment and the estimated bond repayment, which should include other monthly costs such as bond insurance, homeowner’s insurance, rates and levies. If possible, the difference should be set aside as savings.
“The benefits of this strategy are two-fold,” Goslett says. “First, it will build up your savings, and second, it will help you adjust to the cost of owning a property.”
This strategy will reveal to you, as a prospective buyer, whether you are financially ready to own a property and what you can afford. If you are able to meet your savings goal consistently, then you will know you have the budget to buy. If you struggle to meet your monthly savings goals, you might need to adjust your budget and bring it in line with what you can realistically afford.
Goslett says the first place to look for savings is the property you are renting. If your rent is more than 30 percent of your monthly income, it is too much.
“It doesn’t make sense to spend more money on a rental home if it’s holding you back from owning your own property,” Goslett says.
If you’re paying a modest rent, assess your current spending and scrutinise every other expense. You can save by making lunch every day, instead of buying. Or cancel that gym contract and find ways to exercise for free. There are many ways to cut back on spending; it just takes some creativity, Goslett says.

Advisers can change your view of money…


A financial planner should sit down with you and diagnose what is wrong with your finances and recommend treatment in the same way that a doctor diagnoses your health problems and writes a prescription, Gerald Mwandiambira, the chief executive of the Savings Institute of South Africa and a financial planner with Sugar Creek Wealth, an Old Mutual agency franchise, says.
The fact that the country is going through tough times and people are saving less does not mean financial planners have no work or their practices are no longer viable. In fact, there are many financial problems that need diagnosing and treating, and it does not matter how little people have to save, he says.
A doctor charges a fee for a professional service and so too should a financial planner.
Mwandiambira, who was speaking at the Financial Planning Institute’s conference in Sandton this week, says a professional financial planner should communicate the message of saving regardless of how little you have to save. Wealth begins with R1 and is a long journey. It does not start only when you already have R1 million, he says.
Mwandiambira says that to gauge the value a financial planner can add to your finances, it is useful to look at last year’s Old Mutual Savings & Investments Monitor, which shows the financial products held by households in which someone is employed (see “How South Africans save”, link below).
Mwandiambira says the 2015 survey shows that one of the leading “savings” products that South Africans use is funeral insurance: more than 70 percent of the respondents in the survey had one or more funeral policies.
He says many people have multiple funeral policies and pay premiums on these policies for years, despite the fact that you can claim cover only up to the value of the policy with the highest value.
Mwandiambira says many people mistakenly think their funeral policies are life cover that will protect their families if they die, but, in fact, only 30 percent of households with a breadwinner have cover against death and disability.
Many of these people are ignorant of the fact that they need to have a financial plan to ensure their family is properly protected if they die or suffer a tragedy, he says. The financial planning industry has the expertise and knowledge and it needs to reach these people.
Funeral policies are life assurers’ most profitable products, which indicates that people pay more in premiums than they get out in benefits.
When it comes to savings, the survey shows that a lot of money is sitting in bank accounts – some 50 percent of respondents in the survey are using bank accounts as savings vehicles despite the fact that these accounts rarely earn inflation-beating interest.
The survey also shows that only about 50 percent of households are contributing to a pension or provident fund, so there is a great need to encourage people to start long-term savings.
But the survey results do not show what is evident from other surveys: that many people who are saving are not saving enough for a comfortable retirement.
Mwandiambira says because employees want more take-home pay, some of them set their retirement savings as a percentage of their income as low as 2.5 percent and keep it this low for years without reviewing it.
He says the Old Mutual survey also indicates a high use of education policies from life assurers, but he is of the view that 98 percent of them are inappropriate for the policyholder’s needs.
When selling you an education policy, the broker typically asks how much you can afford. This is not the way advice should be given, Mwandiambira says. Instead, an adviser should determine how much savings you need for your children’s education.
Finally, the survey shows a lot of money sitting in informal savings such as stokvels: 60 to 70 percent of households have these savings, but they are, by their nature, often not wealth-generating vehicles.
What people need is a financial doctor to help them diagnose the problems they are having with saving, he says.
Many South Africans have no alternative but to live, work and die in this country regardless of the economic climate and it is time to stop worrying about our low savings rate and the weakness of the rand. Instead, make plans for your retirement and for what happens if you die or suffer a tragedy.
Financial planners have a duty to change how South Africans see themselves, how they treat money and how they can move forward, Mwandiambira says.
How South Africans save