Financially securing your future by Ari Kruger (Prestige Financial Advisor, Discovery)

Proper planning makes for a secure family

Today more than ever, we need to take a closer look at our financial planning and ensure that we not only look after ourselves and our family from the unexpected risks that we face, but also make sure we plan for what lies ahead of us.

When looking at your financial plan you need to look at two main areas:

  1. Wealth Protection
  2. Wealth Creation

The first deals with the risks areas that we and our family are exposed to and the second with savings and investments.

Financial planning. Make sure that you have left your family enough money to cover outstanding debts, while allowing them enough income-producing capital to live on, taking into account the natural lifecycle of the family, as well as inflationary increases in the cost of living.

A valid updated “Last Will and Testament” must be in place together with a Book of Life listing all policies, assets and contact people. Make sure al beneficiaries on all policies are correct and relevant.

  • Becoming physically disabled or impaired: A person’s most important asset is themselves and most times this asset is always neglected and underinsured. Make sure you have a comprehensive income protection policy that, your current standard of living, but that it also takes into account additional medical and lifestyle costs.
  • Critical illness and dread disease: One of the most important risk areas and one becoming more prevalent today than ever before. While income protection gives you peace of mind should you become disabled or impaired, we often don’t think of the lifestyle implications should we suffer a dread disease.

This risk area protects you on the diagnoses of diseases such as cancer, strokes, heart attacks and so on and not only allows for liquid capital to fund shortfalls in your medical costs, but allows you liquidity for a lifestyle adjustment during the period of illness and any changes in your lifestyle because of that.

The two mains areas in Wealth Creation are saving and investments.

  • Savings: Shorter term capital protection-focused.
  • Investments: Medium to long-term capital growth.

Discuss with a qualified financial advisor your investment objectives and time horizon, to do an appropriate risk analysis to bring your portfolio selection in line with your investment objectives.

Three main saving and investment time horizons:

  1. Short-term savings (money that will be needed in a period of less than one year horizon)
  2. Medium term investments (money that will be needed within a 5 – 10 year horizon)
  3. Long-term investments ( money that will be needed in 10 years and beyond)

Short – term savings:

Make sure you have a nest egg to aloow for the funding of unforeseen expenses and events like retrenchment. This money must be easily accessible with little capital risk. The objective is to protect your capital while allowing accessibility of these funds.

Medium term savings:

More goal orientated savings, looking at areas like education, overseas, family vacations, deposits on motor-vehicle, etc. Cost of private education today will take a large amount away from disposable income and very few people will be able to meet these costs without an additional investment plan.

When looking at how much to invest, fist identify at what age you want not be reliant on your disposable income for funding education. Then, at what the costs today are for the proposed school of choice. Take education inflation into account (it’s very different from the inflation the Reserve Basnk talks about.)

You need an investment to give you “real” inflation-beating returns, or your real purchasing power of money will be eroded.

Long – term investments:

With increased medical advancements, people are living longer; one in 10 economically active South Africans are able to retire with 70 per cent of their last income cheque and even fewer with 100 per cent of that cheque. Start investing as much as possible as early as possible for as long as possible.

The biggest problem with retirement savings is that people only wake up to the fact that they need to put money away when retirement is around the corner, when it’s too late.

To decide how much you need to, sit with a qualified professional and look at your portfolio holistically.

  • Begin with the end in mind – know at what age you want to realistically retire.
  • Determine what amount in today’s terms on a monthly basis you would like as an income at retirement.
  • Take inflation into account (be more conservative – build in a healthy buffer into your CPI assumption.)
  • Plan to be completely debt-free at least five years prior to your desired retirement age.
  • Your primary residence is NOT a retirement asset. Only look at assets that will give you an income at retirement as a retirement vehicle.
  • Take advantage of tax-efficient vehicle, RA’s if used correctly are great retirement vehicles.
  • Diversify your growth assets.
  • Don’t make investment choices based on yesterday’s performances.

Assume you want to retire at 60 and you live till 90 with a desired income of R20 000 gross in today’s terms, look at what approximately you will need to invest assuming you are debt-free at different ages, assuming a 6 per cent return above inflation – inflation plus 6 per cent.

Age 20 you will need to invest R2 009 per month; age 30, R3 834 per month; age 40, R8 052 per month; age 50, R22 016 per month. A detailed financial plan looking at all your areas holistically will dramatically improve your ability to tackle financial challenges of tomorrow.

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