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Covid-19 has unleashed financial hardship as a result of lockdowns – but the pain is not over. As Dawn Ridler, an independent money expert sets out here, there are likely to be consequences for those who have suffered the disease. With long-term health effects from Covid-19, insurers are likely to re-assess premiums, says the Johannesburg-based financial planner. Ridler sets out other areas where Covid-19 is hitting our finances – from your bond to your loyalty points. Plus, she provides useful tips on how to manage your hard-earned savings. – Jackie Cameron
Unintended financial consequences of the Covid pandemic
By Dawn Ridler*
Because governments around the world have been buffering the impact of the lockdowns on people and companies with various stimulus and support packages, the true economic consequences of the pandemic are going to take months to unravel, and if you look at the stock markets you’d be forgiven for thinking that it is all over, bar the vaccine. Remember that the stock markets are based on the herd’s future perceptions of the companies, sectors or economy, and is often fuelled by hope and not rational expectation.
Since March there has been a mad rush into tech stocks, some of it understandable (Amazon) others, not so much (Tesla). These stock market wobbles and over-valuations are expected and the market will level itself at some stage. Investing in these uncertain times is a huge challenge, but this commentary is more about some of the consequences that aren’t as sexy or interesting to talk about but could still severely impact your personal wealth.
The more we understand about the long-term impact on the health of people who contracted Covid-19 and survived it, you can expect insurers start to ask if you were infected or not (and penalise you accordingly). There appears to be multi-organ impact in many people who have survived Covid-19, and it is still too early to tell how permanent these side-effects last. This is not just a ’severe flu’ and if you contract it you might not be able to get life insurance (which includes disability and severe illness cover) if you need it.
There is also the possibility of getting ‘exclusions’ (diseases or body systems you can’t claim on) or ‘loadings’ (increase in premium above the ‘standard’) on your policies . Life cover is never anyone’s favourite grudge purchase and most of us would far rather have an ‘investment’, which is why the ‘Get 15 years of your premiums back’ tagline punted by some insurers is so popular. (Just a quick aside, that ‘benefit’ is an optional extra that comes at a price).
If you take that premium out of the equation and invest it separately, you’d get the same amount – and you wouldn’t lose it if you claimed or stopped the cover. The devil is always in the fine print.) Look at it this way – Life cover is Risk cover just like insuring your car, it is there to give you cash when you might not have a full pension pot or emergency fund to help you out. When you (or your estate) can fund your financial obligations on death or disability – you don’t need it. In my opinion, keep your risk and investment decisions separate.
Many of my clients either have, or intend to have, rental portfolios to supplement their income in the future. Even before the pandemic interrupted the business as usual, my advice was always to ‘diversify’ your rental portfolio. This is diversification within diversification, if this pandemic has taught us anything it is to not put all your eggs in one investment or income basket.
If you have R5m to invest in property, rather have five R1m property to rent than one R5m property. It just makes sense, it’s less risky when you have 5 tenants than just one. I also recommend that you control these properties yourself if you can and not abdicate it to a rental agent. Owning a property portfolio is not ‘passive income’ you must keep on-top of it, make sure the property is good hands, insured, the tenants vetted and paying their rent on time.
You may need to upskill yourself but in my experience those landlords that are hands-on have done way better over time. Statistics that are starting to come in (Sept 2020) show that at least 1 in 4 tenants are months behind on their rent (and you can’t evict them at this time). As annual rental agreements come due, the tenants that are paying are negotiating hard for no increase, or even a decrease in rent. It is heartbreaking to think of the thousands of families that are going to face eviction as the moratorium on evictions expires.
Read also: Your money in the time of Covid-19
As a landlord you’re going to have to choose between evicting the tenant (costing thousands and writing off the back-rent), writing off the debt and hoping they continue to pay going forward or come to some agreement to back-pay the rent over time. What ever you decide, make sure it written down and signed by all parties. Speak to your financial advisor about ‘rebalancing’ your wealth portfolio going forward. Some tips from one of my clients who has built a very solid rental portfolio:
- Only rent to two-income families.
- Visit them personally once a month.
- Get references from the previous Home Owner’s association, not just the Landlord.
Insurers and Assurers have fallen over themselves in the last decade to offer incentives that reward you for modifying your behaviour. These rewards may be linked to gym membership, lifestyle changes or ‘well behaved’ miles covered by your car – all of which went out of the window during lockdown. I’ve made no secret of the fact that I am not a fan of these loyalty products in the life insurance investment arena, but learned the hard way that a ‘well behaved’ car sitting in a garage for weeks also messes with your ‘loyalty’ cash-back, despite the fact the risk of it getting into an accident are almost zero. The way these loyalty points are built into policy discounts is highly confusing to the advisor or broker, so as a layperson you’re highly unlikely to get it right all the time.
Loss of equity in your house
If you’re in the process of, or wanting to, sell your house, you’re probably going to find that it is a buyer’s market. House prices were already stagnant before the pandemic, and they could take years to recover. Having shown that ‘work from home’ is a viable solution for many companies, that gradual trend toward ‘freelancing’ and ‘contract work’ has leapfrogged years. Houses that have a dedicated ‘office’ space and access to fast internet will be more ‘desirable’. The lacklustre housing market will be counteracted by the exceptionally low interest rates.
This will help first time home buyers. If you have a bond, paying it off faster right now is probably one of the best ‘investments’ that you can make – there is not much yield or growth available elsewhere. At least keep to your previous levels of mortgage payments if you can’t increase them, it could cut years off the time taken to pay off your mortgage. Moving house frequently is not a great investment decision, the sheer costs (commission, transfer duty, moving costs, renovation) can eat 10% of the value of the property. Find a house that will suit your needs most of your life.
Speeding up of trends at work. How you measure productivity and relevance.
Career paths and the way we work has always been changing, sometimes very slowly. You’d have to be a pensioner to remember the days where all your typing was done by the ‘typing pool’. Being a Realtor/Estate agent was once a lucrative career path, but commissions have been gradually eroded from the once 6-7% down to a half or quarter of that (if anything, because it is so much easier to just DIY). Retail outlets are closing, never to open again – or become ‘show-rooms’.
One unintended consequence of the enforced ‘work from home’ is going to be the easier identification of ‘productivity’. Is the employee able to self-manage and self-motivate? Companies are still feeling their way when it comes to evaluation of employee’s performance during this time, from the one extreme of insisting employees keep the webcam on during the entire workday to completely unsupervised, unmonitored and unmeasured. Having been in the C-Suite often in my career, believe me, the performance of work-at-home employees is going to be core to the inevitable ‘downsizing’ and retrenchment decisions to come.
Need to upskill
This pandemic, unless you have been in a ‘hands on’ career at the frontline of medicine, will have required you to upskill in aspects of your job, and probably had to acquire more disciple and flexibility than ever before. Boomers, rightfully fearful that this virus could prematurely end their careers and way of life, have very quickly learned to Video conference and order online – despite years of resistance from many. Theoretically, you’re going to have more time on your hands because you don’t have to commute (but if you have kids at home, you’ll need that time for them).
Boomers, if they work in the corporate environment, are going to be vulnerable to the scourge of ‘early retirement’ which has a far lower threshold of pain/regulation than retrenchment for corporates. There are thousands of courses available online that can help anyone to upskill at low or no cost (Coursera, EdX, Udemy, Open University just to name a few). If you can build your skills so that you can ‘freelance’ and not just ‘work from home’ you’ll pay less tax – and nobody can force you into early retirement, or to retire when it suits them.
- Johannesburg-based intermediary Dawn Ridler, MBA, BSc and CFP ® is founder of Kerenga.
BizNews Finance Friday: Prescribed assets and your retirement savings. This week we take a look at prescribed assets and how to plan ahead for retirement. Among the experts answering your questions are: Dawn Ridler, an independent financial advisor with a wealth of knowledge on domestic and global investing, and Hermann Pretorius of the IRR, explains why a dry-sounding government policy on pension savings has hit the mainstream: https://attendee.gotowebinar.com/register/6646694434270030861. Get your questions in early at firstname.lastname@example.org
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