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It’s a common human tendency to reflect on a year that is about to draw to its end and plan how we can do things differently and improve ourselves in the following year. In turn, this observation led Paul de Waal to contemplate New Year’s resolutions, but not the regular ones where you solemnly promise to go to gym three times a week, start Banting or go to bed earlier, to name a few. Although these are important, there is another resolution we tend to overlook, one that is vital to our well-being: setting annual financial fitness goals. Overlooking this goal most likely also ties in to a human propensity to think we have time left or that it ‘won’t happen to us’, when the reality is different. In this article, Paul takes us through a discussion that highlights and clarifies the most important aspects of financial planning.
By Paul de Waal*
Step 1 (Warm-up exercise): Complete a financial fitness assessment
Many people have never heard of, much less completed a financial fitness assessment; however, it is a prerequisite around which all your financial planning revolves, because without it you are unable to make informed decisions on how to protect your wealth and mitigate risk.
Definition debunked: Similar to your annual medical check-ups to keep you in optimal physical health, regular financial fitness assessments give you a better understanding of your financial health. Some common personal financial problems that will be highlighted in such an assessment include: not planning ahead; failing to save for retirement; not planning for a rainy day (or a child’s education); or thinking you have put an appropriate plan in place and failed to keep an eye on your investments.
It’s vital that you complete a financial fitness assessment in order to obtain an accurate view of your true financial situation, because when it comes to finances, we often tend to be like the ostrich sticking its head in the ground. This is not a good strategy; leaving your finances unattended can have you in dire straits further down the road. The earlier you start the better. An expert financial advisor will consider various factors in assessing your financial fitness and make recommendations best suited to your personal wealth plan.
Step 2: Protect your home, family and hard-earned savings with your Will
This is another topic neglected by many.
None of us like to think of impending death while we’re busy living life, but it’s an undeniable reality that we need to confront. On the bright side, drawing up a Will is by far one of the easier things to do, administratively speaking. The amount of effort you have to invest is far lower than the gains and peace of mind you will receive in return. It requires the simple exercise of sitting down and deciding where your money should be distributed upon your death.
Two of the most important reasons why having a Will is non-negotiable, consider this; Intestate laws differ depending on your relationship status or whether you had children. In most instances, however, your heirs will inherit from you in terms of the Intestate Succession Act, Act 81 of 1987 – applying to all South Africans irrespective of race or culture. Heirs could include surviving spouses, siblings, family members, even distant relatives.
Having a Will holds many advantages. Two of the most important benefits are:
- If you die without a Will or if you have an invalid Will, it means you have died ‘intestate’. In this scenario, the Law will determine how your legacy is distributed. When no relatives are found the estate generally goes to the state.
- With thorough planning your inheritance tax can be managed or reduced, in the process leaving more money to your chosen beneficiaries.
It is imperative to regularly review and update your Will in accordance with changing circumstances.
Step 3: Make sure you’re protected against risk
Life is a risky business where nothing is a given. We can avoid becoming too morbid and fretting over the what if’s by planning for adverse situations, as this is bound to reduce risk and uncertainty. It is important to insure against eventualities.
Let’s start with an overview of some of the most common types of risk cover:
Life cover:
Life cover insurance comprises three main factors, i.e. ‘life’, ‘disability’ and ‘dread disease’. When we look at the crux of life cover, it should cover your debts and liabilities, and provide for the cost of supporting your family in the event of your death.
Disability cover:
Currently, there are three types of disability cover: Lump sum on permanent disability, income on permanent disability and income on temporary disability. Regarding this topic, it is important to realise that your ability to work until retirement is not guaranteed. As mentioned, life is risky. Temporary or permanent disability will threaten your ability to work; therefore, this is the one type of cover that shouldn’t be neglected.
Income Protection:
Income Protection Insurance (IPI) is an insurance policy that pays benefits to policyholders who are incapacitated and unable to work due to illness or accident. Statistics indicate that less than 20% of South Africans are on a medical aid plan, while a large proportion of the population is not financially prepared for critical illness, disability or early death. It is crucial to start with income protection as soon as possible, preferably at the start of one’s career. This will preserve your future earnings should you become disabled.
Step 4: Consider investing in a Retirement Annuity (RA)
A retirement annuity can be defined as a tax effective retirement investment option for individuals who do not have pension or provident fund or individuals seeking to ensure they can maintain their standard of living during their retirement years. This may include living out your travel dreams or buying that cottage by the sea.
There are many benefits to investing in a retirement annuity, most notably its tax benefits:
- Contributions are tax deductible: you may deduct up to 27,5% of your gross remuneration or taxable income (whichever is the higher) in respect of your total contributions to a pension, provident or retirement annuity fund, subject to an annual limit of R350,000.
- Investment returns are tax free – there is no income tax or capital gains tax on the investment return earned in a RA.
- Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free.
Step 5: Never stop researching and asking questions
Apart from considering the above-mentioned options, also ask some pressing questions:
- Is your money working hard enough for you?
- Are you getting the best return on your savings or investments?
- Is your investment and retirement portfolio structured in a tax efficient way?
- Do you have all your investments in one basket?
Workout completed: Let’s cool down and stretch
In an ideal world your risk portfolio would include all types of protection against risks, but our earnings don’t always match up.
Although January has passed and February is well underway, it is never too late to conduct a financial fitness assessment. As I always say, it’s not how you start, but how you finish, because it’s what you have, after you have it all, that counts.
- Paul de Waal, Onshore Associate Manager at Carrick Wealth.
- Carrick Wealth is a respected and service-driven boutique advisory specialising in wealth and capital management, using our clients’ financial goals as a starting point for developing individually tailored wealth protection plans. Our highly qualified team of professional financial advisers are skilful in growing, protecting and preserving our clients’ wealth, whilst providing independent and expert financial advice. Carrick lives by the creed that none of us is as great as all of us.
