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JOHANNESBURG — As the end of a tumultuous year in South Africa nears, many people will be reflecting on their own personal situations and how they can improve it. It’s been a period of belt-tightening in the country amid weak economic growth and a tough jobs market. But regardless of external forces, there are factors that you can take control of today to help create a better financial future for yourself tomorrow. Richus Nel, a financial planner at Brenthurst Wealth, gives us some insight into what some of these measures are. – Gareth van Zyl
This special podcast is brought to you by Brenthurst Wealth and with me on the line from Cape Town I have Richus Nel, who’s a certified financial planner at Brenthurst Wealth. Richus, you’ve written a very interesting op-ed in which you say that inflation and interest rates have been at record lows for many years in SA, resulting in households – just like government – struggling to keep to their budgets and reducing their debt-to-income ratios. Do we have a personal finance crisis in SA, just like we have a general economic crisis?
Hello Gareth and hello to our listeners. Gareth, I wouldn’t express it as a personal finance crisis. I think that personal finance in many instances is the same as personal fitness, and you can always be more fit and more equipped while being more profitable at investment. You can also be more tax efficient, more cost efficient, and be more empowered to take good financial decisions. So, I wouldn’t describe it as a crisis. I think it’s worth it to draw some emphasis to say that we have had it easy, in terms of interest rates, in terms of inflation, and that individuals should start focusing on making financial progress in these favourable times.
In the op-ed that you’ve written, you focus on factors that people can control. Let’s just go through some of those factors here. The first one that’s interesting is finding out where you are financially in terms of budgeting. Are South Africans doing enough of that?
I think what we see is that budgets are missing in many households. People have got a rough estimate and idea of what they’re spending money on, but they don’t necessarily track their expenditure. It’s not a matter of being penny wise, pound-foolish. It’s literally just understanding what you’re actually spending your income on and, a lot of the time, there are leaks in that process. There’s active decisions that can be made. For example, it could be a Telkom bill that you’re paying, or an insurance bill – you just constantly need to evaluate. Are you getting value for this item and for this expenditure? If you’re not then what are the alternatives? Really, you just need to be cognisant of getting the best out of your money and constantly evaluating what are the alternatives, and is this the best spend. In my view, it’s very difficult to be on top of that really, if you’re not budgeting. Now, budgeting can be looked upon as a boring or a dull sort of exercise. But I’ll argue to say that budgeting does allow you to set down particular goals and objectives, and that it is the most effective way to see that you are actually living the lifestyle you’re wanting to live and that you are achieving those financial goals, and that you’re going forward in financial terms, in life.
There’s lots of interesting internet tools that can help you with budgeting. I know that there’s the likes of 22seven for example, which makes it that much more colourful and interesting.
Exactly. So, it’s something that became easier over time. If you just think about the online banking services that you’ve got – basically, you have all this information at the tip of your fingers. Some of the banks offer tools as well, and I think this is what you’re referring to, where it draws and maps certain expenses into certain categories automatically. It basically, just gives back control of your personal finances.
One of the points that you also mention is having multiple income streams. Is this often an overlooked factor?
I definitely think so. I think it’s typical for everyone to be absolutely focused on your career and trying to make sure that you keep that ball in the air. A lot of the time, you risk ignoring some other alternatives of generating money on the side. It could be an entrepreneurial idea. The less cost and capital intensive idea is, the better. You may also want to try and convert existing items that you might have in money makers. That’s really just capital that’s not active in generating any wealth or income for yourself. Some of those are typically quite logical conversions that can be made. I think a lot of people have jumped onto the Airbnb idea. Now, I’m not saying that’s the ideal one but it’s a very good example of how technology allows people, from a very passive item, to start generating some income. Even if it’s R500 a month, or even R1 500. A lot of the time that can also emerge into a mini-business that can grow over time. Multiple income streams basically allows you to free up more cash flow, enabling you to have more alternatives of generating income.
What about the rate of return when you’re in your working age and investing, as well as the draw-down rates once you’ve retired? What are the key considerations to consider here because these two factors seem intertwined?
Yes, all of us have a risk comfort zone and within that risk comfort zone you’re feeling very safe. If you’re not enticed to increase that, you will remain there for the majority of your life. Some people are in a comfort zone lying in cash. Others might be in things like gold even, and your financial advisor is very well equipped in understanding how markets behave. They’re very well equipped to draw people out of that comfort zone, allowing them to take a bit more risk, explaining to the clients what those risks are and the expectations from it. In doing that, you actually, over time, are able to earn a superior return on your available capital. Doing some basic calculations: If you invest R1m over 20 years, the additional RAND return received from a 2%-3% higher investment return (from taking more risk), amounts to R3m over this period.. So, people shouldn’t underestimate what the reward for that additional risk can amount to and that it can, in a lot of instances, determine how soon you reach financial independence.
And drawdown rates, you talk about decreasing the percentage of draw-down rates when you are retired as well.
Yes, so that’s post-retirement. In terms of the draw-down rates, we recommend that the income that someone in a post-retirement phase can actually draw should be anything between 4% and 5%. I think that’s the norm and the accepted norm in our industry. Obviously, the earlier you retire it changes, like someone retiring at 55 cannot even consider anything more than 3%. So, the ASISA Institute has also provided a guideline and a table, which implicates and illustrates what are the implications of a higher draw-down of income on capital. Let’s say an investment yields around about 10%. If you are able to reduce your drawdowns from 7.5% to 5%, you’re basically extending the lifetime of that investment for a mere 20 years. It could be exponential (the benefit), if you can just reduce the income down down rate to more acceptable levels. Another component to consider with drawdown rates is the sequence risk of markets. Markets go up and down, sometimes they go sideways.The sequence of these movements are out of our control. What investors can control is to remain on the conservative side of that 4% income drawing. That’s the best remedy that you have, to counter sequence risk.
There’s other things you can do as well. You could perhaps ringfence some income for a year or two years. What’s very interesting is that there’s a psychometric risk analysis assessment tool, which has been developed by a business called FinaMetrica. According to their research the recovery time of in particular, the SA market over 30 years is as follows:
Now, in terms of just the normal Reg 28 balance fund, a high equity balance fund in SA, its worst drop was in September 1987 – it dropped between 21% – 25% from the peak to the trough. It took 10 – 11 months to recover. So that shows you that in a drawdown phase (besides remaining on the conservative side), I think it’s important to have some income ringfenced that is conservatively invested in times like this. This enables your investment to recover, and that income is not drawn from, let’s say, an equity portion of your retirement capital.
What are some of the key pointers to consider regarding tax rates when you’re investing? A lot of people don’t always pay big attention to that particular aspect.
Yes so, I think there’s very few individuals in SA who feel that we’re not overtaxed. I think tax is becoming a massive matter. There’s calculations that are done and updated annually, and I think, in a calendar year, we work up to somewhere in May, whereby you just work for government in the taxes that you’ve been paying. I think just to a large extent, the focus and refocus on tax and being tax efficient is going to and needs to enjoy greater emphasis going forward. When we see individuals, in terms of their personal finances, that’s one of the components that a lot of the time is not in the spotlight. The spotlight is mostly on what are the returns, what are the income components, etc?
In terms of, let’s say, just utilising tools that’s available out there (whether it’s retirement annuities or even employing an endowment structure), it makes a huge difference of how tax efficiency can actually work in someone’s benefit. Smaller components like your tax-free savings account, is also an obviouse remedy. The benefit of using these tools increase exponentially over a longer time, say 15 – 20 years in size.
Richus, finally, you talk about also adding meaning to your life when using your money, such as using your savings to go on a sabbatical or taking some time out or donating it. How important is this in the greater scheme of your personal finance plan?
Well, Maslow reckons that this part is called self-actualisation and that it’s a basic need. It’s the top-layer of 5 basic needs, and you see that when people reach this phase of financial freedom and financial independence there’s actually quite a big need of individuals ploughing back, whether it’s engaging in a mentoring session, giving money to certain institutes, etc. So, I think it is actually a huge component that people strive towards. Many people never get to the point where they can actually commit to some of those initiatives, but what I try to allude to there is to say, when you do have this freedom – reward yourself first. I think there’s very little people that will get to the end of the journey or to the end of the first phase of a journey (where you reach financial independence), who don’t’ feel that they want to spend more time with themselves for a little bit, to figure out life better for themselves. Take a breather and, as I say, go and do a sabbatical, tour the world, or whatever is on that bucket list path.
What is important is not to withdraw completely from society. What we see is when people do that they age very quickly. They lose their edge, but also from a health state. it’s also just encouraging people that when you do have that freedom – try and stay onboard. Try and remain relevant, give back to others, whilst enjoying this fruit of hard work and being so committed in achieving financial independence.
Richus Nel, it’s been an absolute pleasure talking to you today, and thanks for giving us this insight on personal finance.
Thank you very much, Gareth. Thank you for your time, and thanks for having me.
This special podcast was brought to you by Brenthurst Wealth.
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