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By Sonia du Plessis*
Another interest rate hit already nervous investors this week. Added to that the economy continues to worsen as the power issues continue and the beleaguered currency is taking strain, making investment decisions difficult and stressful. However, it’s in times like these that you need to pay extra special attention to your financial plan.
When the odds seem stacked against reaching that dream retirement you’ve envisioned, it’s always worth going back to basics. My suggestion to investors is that all you need for a chance of securing a happy retirement or be a successful investor is to build the following five key pillars into your financial plan.
Pillar 1: Investments
The first pillar of financial planning is making investments so that the wealth you’ve accumulated is put to work over the long term. It is never a bad time to invest, regardless of what equity markets are doing. Not easy to invest your hard-earned cash when markets have done so poorly, but remember it is historic data you are looking at, and you are buying in at market lows.
As part of this process, the most important consideration is where you put your money. Diversification is all about spreading your money into different buckets so that your risk is not too concentrated. How much you put in each different bucket depends on many factors, from the state of the economy, inflation, interest rates, you risk profile, your investment goals or how close or far you are from retirement.
Read also: Adopting a ‘Resilient Mindset’: Navigating financial success amid economic challenges
Pillar 2: Income planning
This is the process of creating a detailed strategy to determine how much income you’ll need to live the retirement lifestyle you want.
Your circumstances will differ from others in unique ways that determine how much you need, how much you have and how much you can safely draw every month.
It’s important to understand what your sources of income will be in your retirement: company pension, investment returns, rental or other forms of passive income. All these need to be understood and accounted for in your income planning.
Investors can expect a juicy yield of between 9%-11%pa, from income funds at the moment, with interest rates and bond yields being at all-time highs.
Pillar 3: Insurance
Often seen as a grudge purchase, insurance is simply the intelligent way to better manage your risks. By doing so, you limit the damage to your savings pool in the event something unplanned happens.
An emergency could have dire consequences on your financial position if you’re not sufficiently prepared for these eventualities. The key is to remember that short-term insurance covers you against loss, while long-term insurance like life cover protects your loved ones.
It is important in the same breath, to review your short and long term insurance on a regular basis. It doesn’t make sense to be over insured and wasting money that could otherwise be put to good use.
Pillar 4: Tax planning
Planning your taxes might not be considered as much fun as planning your investments, but it is an equally important pillar to include in your financial plan.
This is a source that could drain your savings quicker than planned if you don’t take the right actions to reduce your tax obligations in line with your reduced earning potential. Falling foul of SARS is unpleasant and costly exercise that you can avoid by speaking with a tax and financial advisor.
Simple planning and clarity over your obligations can keep your financial plan on track and the tax man from ringing your doorbell.
Read also: Your credit score and your financial well-being
Pillar 5: Estate planning
A good estate plan should include staples such as a last will and testament, a power of attorney, a living will, and a healthcare power of attorney.
Although a trust isn’t appropriate for everyone, there are very clear cases in which your family can benefit from using this structure to house your assets. This is especially true if you have a substantial estate that your family will rely on to carry on your legacy.
No matter your personal circumstances, you can help to avert a future financial crisis by taking action today to start building these five pillars. There is no ideal or preferred order in which to build them, but by doing so in a consistent manner you can help to shore up your retirement finances.
Certified financial advisors are in the best position to help you plan a path to building these pillars. They have the resources to make more informed projections of what we might expect, and they have the knowledge to plot a path to success, not over the cliff like the ZAR.
- Sonia du Plessis, CFP® is head of Brenthurst Wealth Stellenbosch [email protected]
