I came across a fantastic saying the other day. ‘Act your wage‘.
It reminded me of a movie I watched many years ago, called The Joneses. It’s about a fake family – employed by some bizarre marketing company – who move into an upmarket area.
Their purpose – through driving pricey cars, wearing high-end clothing and even eating fancy foods – is to sell a lifestyle to the society they immerse themselves into, through subtle product placement.
Pretty soon, the neighbourhood falls for the unconventional marketing, and start to desire the various items the Joneses peddle. Long story short, it all ends in tears – one of the characters commits suicide over the mountainous debt he’s racked up, all in the pursuit of Keeping up with said Joneses.
Yes, it’s just a movie – but it really is a reflection of what society is today, particularly for younger people. We’re glued to social media, fixating on what celebrities and influencers are doing. What clothing brand they’re wearing, what club they’re partying at. Even which countries they travel to.
It may not be direct marketing either. That picture they post on Instagram may have nothing to do with the shoes on their feet or the car they’re driving. But we’re exposed to it so consistently that these desires becomes subconscious. There’s nothing wrong with wanting nice things. The problem, however, is when we try to cultivate an image that doesn’t agree with our bank balance.
Financing a lifestyle you can’t afford is already a serious issue. Many young individuals can’t help but fall for the trap. Spending nearly their entire salary on luxury car instalments. Partying on credit cards. And for whose eyes?
Squandering your cash may be impressive to the naive and vapid, but trying to keep up with the Joneses only leaves you very far behind. According to DebtBusters, the suggested age an individual should start saving is at 23. However, ‘only 56% of employed South Africans start to save at the age of 28’.
Without some form of savings, there is nothing to fall back on if the unexpected suddenly lands in your lap. ‘As a result, they borrow. Once over-indebted, they are subjected to more borrowing to repay existing debt and to meet day-to-day obligations, leading to a debt-trap’, says DebtBusters.
Life is to be enjoyed. However, there is a time to be responsible. The faster you go in your pursuit to keep up with those wretched Joneses, the harder you crash.
Last week, I asked you to send me your finance and investment queries. Here, Mags Heystek* of Brenthurst Wealth shares his expert advice by providing answers to your questions.
Fred Calitz asked,
Properties (in SA) have unfortunately become money traps, and are not providing real returns (i.e. taking inflation into account). Yes, there may be a few people who argue differently, but in general, properties in SA are just simply not viable income generating investments. You have to deal with non-paying tenants, damages, maintenance, and not to mention estate agent commissions and transfer duty as well as potential capital gains tax liabilities. Buying a property is the easy part. Maintaining it and generating an income that can be adjusted with inflation and generating a profit is the difficult part.
On the topic of Exchange Traded Funds (ETFs) they are a type of security that involves a collection of securities – such as stocks/shares – that often track an underlying index. ETFs can invest in a different number of sectors or use various strategies. ETFs typically attract lower fees as they primarily track an index. From a South African point of view, we have both local and offshore weighted ETFs. Investors do have access to offshore ETFs, but the denominated currency is typically USD, and needs to be accessed via an offshore platform. We also need to explain that you have rand denominated ETFs with offshore weighting, which means that an investor trades in rand, but with an offshore outlook. Different ETFs can track the JSE/ALSI, the S&P 500, as an example, in rand terms, as well as tracking the S&P 500 in USD terms.
The difficulty with relying on ETFs for income is volatility. Whenever investing in equity(shares), a considerably larger amount of risk comes into to play. You have mentioned that you will require an income for your retirement, but in my personal opinion, using a primarily ETF weighted portfolio will not be the best option. With rand denominated offshore ETFs, South African investors face several risks, primarily currency fluctuation as well as overseas valuations. As ETFs track the market, investors could potentially have a situation where rand strengthening and offshore assets devalue, at the same, which is the worst case scenario.
Although ETFs can form an effective and useful part of an investment portfolio, annuitants should rather diversify portfolios and receive income from more stable sources (such as money market and income funds) to minimise drawdown on portfolios. What is meant by this? Well, if a certain ETF portfolio performs -10% for the year as an example, a further drawdown of 5-6% would equate to a total drawdown of 15-16% for the year (without taking fees into account). This means that the following year, the portfolio would have to perform by 20-21% just to break even, and would need to perform at least 25% to cover your income for the following year, and this is just not very realistic. Of course this is a very simple example, but hopefully highlights the risk. A very common example I use with clients is when I ask them the following:
“Are you willing to receive a 30% return in a year?”
Yes, of course (obviously), is the common response.
– “Then how would you feel about losing 30% in a year”
And that’s where the conversation gets interesting regarding volatility. If you are willing to gain 30%, then you need to willing to lose 30%. Investors need to re-adjust their expectations, and also understand that it’s not always going to be positive figures. As you are also at retirement age, capital preservation is just as important as generating growth, but it needs to take place organically, and not placing your investments under strain.
With regards to your question on a wrapper, this is a generic term referring to an endowment, and is not suitable when drawing an income, as there are restrictions on your withdrawal frequency. An endowment is an investment structure whereby all of the taxes that can accumulate in an investment is levied at a flat rate of 30%. This means that your income tax and capital gains tax are taxed at 30%, versus a potential higher tax rate if you happen to fall into a higher tax bracket. Endowments can have different time frames, but the most common time frame currently is 5 years. You can invest in both a local and offshore endowment, and all of your tax is levied within the investment, so there is no need to request a tax certificate when submitting tax returns.
My final comment on retirement planning is quite straightforward. It is not an answer that you will get from browsing the internet, and investing itself comes with its risks. It’s important first and foremost to draw up a budget, get an understanding of your income requirements, and then having an advisor assist you with a financial plan. Reviewing your plan is also very important, because the opportunities and threats in the investment market are constantly changing, so it’s crucial to review your strategy frequently.
*Mags Heystek is CFP® and Head of Brenthurst Wealth Sandton office.
Have a question about share investing? Write to me at [email protected].
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