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By Richus Nel*
Anyone can reach financial independence. With the right mindset. And, of course, an action plan.
The perilous state of the South African economy is well-known and the festive season started with a significant increase in the petrol price that will affect holiday budgets. There is already speculation about tax increases to be announced in the 2018 budget. All round, personal finances are facing threats. But it does not have to derail financial goals. It requires taking charge.
Find out where you are financially. Nothing can be managed without having all the facts. Take a long hard look at your current financial reality. Once you know where you are, decide where you want to go and decide how badly you want to go there. Simulate and project your current reality and determine if you are happy with the outcome over a 10 / 20 / 30 / 50-year time span. If this is not the reality you want to be confronted with at age 70-80, change course now. Any small change made today can make a huge difference later.
Budget for a meaningful but frugal living standard. Realise that achieving your financial goals are entirely within your own hands. Not the government, your employer or anyone else can influence your financial position over the long-term. You will have to take control and decide on what you will spend your money, how much and how often. Unexpected expenditure normally wipes out any intention of saving, therefore save a realistic and sustainable amount through the first monthly debit order. Let this savings amount automatically escalate by an inflation multiple annually (once, twice, even 3-4 times inflation, if you have waited too long). This could correct a savings “backlog” dramatically over the medium to long-term. The goal is to accumulate income producing assets (passive or semi-passive), that surpasses your monthly income in a sustainable manner.
Financial independence buys many career options and at least translates into an option for a second career of choice. All over the world people are living longer and many people want to leave a useful legacy behind (self-actualisation). Take a sabbatical (self-development), take a GAP year or two. Do what you always wanted to do, something that adds meaning to your life (touring the world by sailing / hiking / cycling). Legacies are not all about money but also time, energy and ideas that can be contributed to make the world a better place. Once you have accomplished financial independence, take a breather as long as you want.
Smart conversion (now)
Multiple income streams lower financial risk. Most individuals closer to retirement, have some resources or assets that can generate income on conversion. This could be in the form of a holiday home, additional vehicles, boats, trailers, caravans or even just a spare room in your home. With minimal conversion cost, some of these items can potentially be converted to generate additional income.
Risk vs. return
The rate of return is going to be one of the biggest decisive factors of how soon you will reach financial independence. There is a massive difference between compounded returns of “inflation +3%” vs. “inflation +5%”. On R1m for 10 years the difference is R2,367m vs. R2,839m and for 20 years R5,604m vs. R8,062m respectively. Employ a financial advisor that could accompany you outside your risk comfort zone. A disciplined and process-driven financial advisor is familiar with typical long-term market behaviour.
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By reducing income drawing from 7.5% to 5% p.a. stretches the investment lifespan for 20 years (ASISA table on living annuities at assumed 10% investment returns). The results of any chosen drawdown rate firmly rest on how market behaves over the first three years straight after investment.
According to the latest result from FinaMetrica research (international psychometric risk assessment tool), the following portfolios have (over the last 30years) behaved accordingly.
- 100% General local equity investment – worst loss 38.5% [May 2008 (recovered within 22 months) – Best annual rise 34.5%
- A “Regulation 28” High Equity Balanced fund (60-70% equity) – worst loss 21-25% [Sep 1987 – (recovered within 10-11 months)] – Best annual rise 30%
- A low equity fund (max 40% equity) – at worst loss 14% [Sep 1987 (recover within 7months) – Best annual rise 30%
Sequence risk clearly have a huge impact on the value of a post-retirement investment (with drawdown). When markets rise and when they drop, we have no control over and also not in which order. Post retirement draw down management, requires a draw of less than 4%-5% of the investment value per annum. Escalate the income amount with inflation annually, not the percentage.
Health choices relates to real wealth
Make good decisions regarding your health, throughout life. This will determine the quality of your life later, regardless how much wealth you have accumulated.
Tax / Costs
Excessive tax and investment costs are the penalties of being unassisted in financial decisions. Taxes are a fact of life, but can be managed to achieve tax efficiency. The guidance of a tax expert or advisor can make a big difference.
Financial outcomes are mostly driven by active decisions made (or not made) in the past. Actions follow thoughts. Start small and gain momentum incrementally towards financial independence and make the journey a lot shorter by taking an experienced financial, legal, tax and medical advisor along.
- Richus Nel, Financial Advisor, Brenthurst Wealth Management.
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