The Financial Coach™ - Managing people & their emotions around money » Financial Education

Retirement was never meant to be that long!

Gregg — Sun, 27 Nov 2011 14:57:29 +0000

Conventional wisdom holds that 9 out of 10 (South Africans) will not be able to retire financially independent. I have never actually seen the research that underlies these figures – most of them seem to emanate from the insurance and asset management companies. Depending on which (marketing) material you read the number might differ slightly but they all agree on this – most of us won’t be able to afford the “best years of our lives”. So are we just not saving enough or is there something else fundamentally wrong with the status quo? In order to answer the question it is necessary to have a (quick) look at the history of retirement as we know it. In short, retirement was never meant to be the long unproductive period that it has come to be.

As a concept, retirement is a relatively new thing. Its roots can be traced to Otto von Bismarck and Germany in the late 1800’s where he introduced a disability insurance programme for anyone over the age of 70 (there were not many) and in reality it was just an attempt by him to retain the loyalty of the workforce. The first private pension fund was introduced around the same time by American Express in the US and shortly after this the first union pension fund was introduced. The uptake was initially slow but from 1910-1920 as favourable tax regimes were introduced the number of funds quickly grew to more than 200. By 1932 about 15% of the US workforce was covered.

Then came the “great” depression and in 1933 with 25% of the US population unemployed, 50% of the elderly living in poverty (many of the private pension funds collapsed) there was a growing call for the elderly to demand pensions from the government. They (the government) quickly responded and in a move that was mostly an attempt to maintain political power and control, FD Roosevelt and the new Dealers introduced the concept of enforced retirement. This was largely in an attempt to get rid of an ageing workforce and in doing so to make way for the young unemployed masses, thereby getting them off the streets and stop them from rioting as they had done in Germany and elsewhere. The plan to fund this was simple: get the younger members working and then use their taxes to fund the pensions of the older retired workers.

All that needed to be decided was the age of retirement. There were global precedents ranging from 60 to 70 (as well as the biblical notion of “three score and ten”). When they initially agreed on the age of 65, life expectancy in the US was around 63. In the 1930’s, if you reached 65 you were considered really old – kind of like today’s 95+ brigade. In reality, most people were set to die before they retired and the age was quickly reduced to 62 years. So, in theory at least, you retired at 62 and then spent a year in retirement getting your affairs in order before you then “checked out” for the last time.

Today, especially with the advancement of modern medicine, it is not uncommon to find people spending more years in retirement than they did working. Someone who retires today at 55 has saved for 35 years (max) and then possibly needs to fund the next 35-40 years from this saving. No wonder 9 out of 10 people will not be able to retire financially independent! It is not only that they have not saved enough but also that retirement was never meant to be that long. The odds are fully against us – how can you fund 30+ years (with all those deferred goals and with rapidly increasing medical costs) when you only have 30-40 years to save for it? Nope, I think we have it wrong and so do a growing number of well-respected financial planners.

But let’s go back to the early 1900’s for a bit. At that time there was a widely held view that the aged could add little value to society – part of this perception can be attributed to William Osler (so called father of modern medicine) who in his famous “fixed term” speech in 1905 stated that anyone over the age of 40 should be retired and that men older than 60 should be cholorformed. “Take the sum of human achievement in action, in science, in art, in literature – subtract the work of the men above forty, and while we should miss great treasurers, even priceless treasures, we would practically be where we are today. . . The effective, moving, vitalizing work of the world is done between the ages of twenty-five and forty.”

While his speech may have been partially tongue-in-cheek (he was 60 at the time) there was a growing perception that older people could no longer add value to society. Fortunately we (mostly) no longer think this and there are a growing number of older professionals still (happily) working – like the 87 year old doctor I met who was still studying (much to his son’s distress because he thought his dad should have retired already).

Life’s about balance they say and traditionally this has been about being a loyal and hard-working employee in order to earn money that you might be able to enjoy later. We’ve been encouraged to save our money and defer our dreams until one day when we have the time and money to do them. The “New Retirementality”* is shunning this idea and is opting to play now and then work longer. You might never get to retirement and if you do, you might not have your health or partner to enjoy it so let’s rather enjoy our money now (within reason) and work longer. The benefits are many-fold, here are just two:

1. We get to do the things we want to while we still can and with the people we love, and

2. It takes away the pressure to have a massive retirement pot to fund the unproductive years – with the power of compounding an extra 5 or 10 years of saving makes a substantial difference to the size of the pot eventually available.

People are also starting to realise that retirement is not just a financial event – rather it is a life event and if not dealt with on this basis it could have significant and far-reaching consequences. It is not uncommon to hear of people dying soon after retirement or even to find that many relationships come to an end as well. A person’s sense of self-worth quickly declines when there is no longer a purpose/reason to live. A decline in health and relationship stress often go hand in hand with this loss of purpose too.

So let’s accept that most of us wont be able to stop working at 65 and make peace with the fact that we will work longer…just make sure that if that’s the case that you enjoy doing what you do. If not, then find something that you love doing and that you can do for longer. Just make sure that you take time before then to stop and smell the roses along the way.

Retirementality* – this is taken from Mitch Anthony’s excellent book called the “New Retirementality”

This article was first published in Finweek – 25th Nov 2011

Desperate but not doff!

Gregg — Mon, 14 Nov 2011 07:03:28 +0000

On the same day that Trevor Manuel was quoted in the news about the debt trap that South Africans are facing (http://www.fin24.com/Economy/Manuel-Too-many-caught-in-debt-trap-20111103) I found a flyer on my car offering me a loan of anything from R3000 to R100000. The flyer stated that “Government Employees and Private Sector are welcome. Garnish (sic) and blacklisted welcome. Salary must be paid into bank account.” All you need to apply is the following: • SA ID document (just a copy according to them) • Latest original pay slip • 3 months bank statement showing the latest salary deposit So far nothing seems to out of the ordinary but then there was the following “clincher”. “To speed up the process, kindly fax your documentation or sms your name, surname, ID no, gross and nett salary, company name and bank name to:-“ Co-incidentally, I also attended a workshop on personal digital security in the same week that I received the flyer and my immediate response to the flyer was “you want me to fax my information to a complete stranger?” We have no idea how big identity theft is or just how much of our personal information is in the public domain and how easily accessible this is to “identity thieves”. There are people who are employed (in normal 9-5 jobs) whose sole task is to trawl the internet to see if they can get hold of information like this that they can then use or sell to someone else who can then use it. This particular loan company may well be a “legitimate” outfit and it is also unlikely that anyone who is this indebted has much in the way of “credit” that is worth stealing, but anyone who is willing to part with this amount of information to a stranger without even having met them is asking to have their identity stolen. I hope that despite being desperate, South Africans are at least not doff. We need to be much more vigilant about the amount and content of information that we publish or even throw into the rubbish bin. Start with something like your Facebook account – make sure that there is no “sensitive” information that can be harvested from your profile. Change your banking passwords every 6 months (and register for the sms alert service that notifies you each time there is a transaction on your account). Make sure that when you pay by credit card that it never leaves your site (it is quite a simple matter to get your card and cvv numbers). Better still, make sure that you have a credit card with a pin number. If you store your bank account numbers and passwords on your computer (like most of us do) then make sure that your virus software is kept updated and that your folder with all this information is encrypted.

This artcile was published in Finweek 11 November 2011

One man sells and another buys…

Gregg — Mon, 24 Oct 2011 07:50:20 +0000

About 2 weeks ago I was sent a link on you tube which contained the (now famous) interview between the BBC and Alessio Rastani http://www.youtube.com/watch?v=aC19fEqR5bA where he was predicting the imminent collapse of the financial markets (and I guess the global financial system as we know it as well).

When I first viewed the clip it had around 16000 hits and I have just received it again (from another client) and it now has almost 2.1million hits. While there may be some truth to what he is saying, this is also a kind of self-fulfilling prophecy in that people listen to it, panic and then sell. Which results in more people panicking and selling and this then leads to wholesale panic and market meltdown. At least he was honest and admitted that if the market collapsed he stood to make money from it – so he clearly has a vested interest to see it fall (and will possibly go bankrupt if it does not).

As I reflect on this there are at least 2 things that come to mind.

1. There are many people currently predicting the imminent collapse. I was at a presentation recently where the presenter joked about this and made the comment that the markets had correctly predicted 9 of the last 3 recessions/crashes. Remember Fred Crookes who quite a few years back persistently predicted a major crash on the JSE – after getting it wrong so many times he finally got one right and the market did fall. I guess that if you predict something often enough it is bound to eventually happen. Bottom line is that no one knows where the market is headed – if they did they would not be talking about it they would be retired – but interviews like this make for “good viewing ratings”.

2. I also remember reading the following quote a few years ago “One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” This was by a chap called William Feather and what people fail to realise is that in order for shares to trade you have to have both sellers and buyers. So when the market falls and people are selling off massively, remember that for every seller there has to be a buyer! And this is where the real money is made – that’s how well known investors like Warren Buffett have made their money – they buy when everyone else is selling.

A third thing to remember is that when you invest money, you are doing it for the long term. Guys like Alessio are traders – they have no interest in the long term – they hope to make money from short term price fluctuations (which are often a result of irrational and emotional decisions made by so-called long term investors). I think Warren Buffett sums it up well when he says “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” If you cant do that then perhaps you should not be investing your money – there are other options that you should be exploring.

The other options include things like asset allocation and target return funds where the equity exposure is limited and the fund manager makes use of the other asset classes such as bonds, cash and property as well. The aim of these funds is typically to preserve capital over all 12 month periods and to produce real returns of 3-5% over rolling 3 year periods as well. There are some really good managers in this space and many of them have in fact outperformed the ALSI over the last 3-5 years!

This article first appeared in Finweek 21st October 2011

One pay check from the streets!

Gregg — Thu, 20 Oct 2011 12:46:25 +0000

Eye witness news recently ran a story that stated that according to at least one homeless shelter, it is currently the middle class who are most vulnerable to ending up on the streets. The journalist had interviewed quite a few (recently) homeless people and discovered that they were previously middle class but had all suddenly fallen on hard times due to retrenchment/job loss and as a result ended up on the streets (or in informal settlements).

I was asked if I would comment on this and a few questions around insurance and its importance were posed to me. I duly answered them and they ran the story with the sound bites. But later that afternoon while I was out running I was reflecting on the story and suddenly thought to myself that they were the correct answers to the journalist’s questions but the problem was that they were the incorrect questions (and assumptions).

The problem is that if you are retrenched or fall on hard times suddenly, insurance won’t help you out…apart from not really being able to insure against retrenchment, if you are retrenched you will also not be able to afford your insurance premiums if your cash-flow is up the creek and the policies will lapse and be worthless.

On reflection, I think that the “secret” to insuring against this scenario is maintaining a positive cash-flow and having an emergency fund.

As long as you spend more than you earn and increase your debt levels as a result, you are just one (maybe 2) pay checks from ending up on the streets. The reason that the global financial system is in the current mess that it is in is because of too much debt. We have been living one pay check away from bankruptcy for too long. Countries (people) have borrowed more money than they can now afford to repay and they are going to default. And people are going to end up on the streets.

One of the pillars of good financial planning is to have funds for an emergency. One of the major financial risks that we all face is having funds for that inevitable crisis – whether this is a burst geyser, a new gear box for the car, root canal surgery that the medical aid won’t cover or even retrenchment!

The problem though is that most of us are paying off debt. As a result, cash flow is completely out of control – we can’t even make ends meet on a monthly basis and there is no way we have any surplus to put into an emergency fund. My advice is to go back to basics – revisit your budget and see where you are spending your money and how you can cut down your expenses. Start with something like bank fees – even R50/month is R600/year that you could save. Don’t underestimate the importance of a budget and positive cash flow when it comes to financial planning!

The Emergency Fund: the theory is that you should aim to accumulate sufficient funds in an emergency fund to cover 6 months’ worth of income needs. This is the ideal and if you are paying off a bond or debt you probably don’t want this amount of cash sitting in an account earning (significantly) less interest than the debt is costing you. In this instance you would either have less in the emergency fund or if you have an access facility on your bond, use that.

Why 6 months and is that not too much? Yes, you could probably get away with less than that and even 1 month would be better than nothing. But imagine if you were retrenched suddenly – how would you feel knowing that you had sufficient cash to cover your living expenses for the next 6 months? Now that’s the kind of insurance you should be putting in place to keep you from ending up on the streets!

This article appeared in Finweek 28th Oct 2011

What’s up with SARS and tax clearance certificates?

Gregg — Tue, 20 Sep 2011 09:30:53 +0000

I have written about this before but the issue has come to the fore again when I recently applied for a tax clearance certificate for offshore investing on behalf of a client.

On the face of it, exchange control legislation has all but fallen away with the announcement by National Treasury that individual investors can take R4million offshore each year. But it seems that someone at Treasury forgot to tell SARS that it is ok for people to take money offshore.

In my experience, it is just about impossible to get a tax clearance from SARS at the moment. The number of hoops that need to be jumped through seem to change quite regularly, they lose the application form, they have different “standard” processing times and then tend to decline the certificate on minor technicalities (it seems that at this stage SARS require a prospective investor to have the amount they intend investing actually sitting in their bank account).

So while exchange controls might officially have been relaxed by National Treasury it seems that another government department is making it almost impossible to get official permission to take the money offshore. The result of this is that people will eventually give up on the the “right thing” and will find other ways to take money offshore again. But is that not the reason we needed a whole big amnesty a while back?

Surely someone at Treasury needs to speak to someone at SARS and find out why they are being so difficult with the tax clearance process? The result of SARS’ approach will be increased non-compliance in the future (especially if we see the rand weaken again suddenly).

The role of the financial planner…

Gregg — Fri, 09 Sep 2011 14:08:05 +0000

Have been busy with a death claim on a retirement annuity and have managed to get an extra 50% added to the payout value…read on for the details that once again highlight the value that a financial planner can add to a client’s portfolio.

About a month before our client died we sat with him and his wife to work through all his insurances (he had been diagnosed with terminal cancer). We did not do a lot of his old policies but managed to get a printout on his policies from the insurance company which showed that there was a death value of R233000 on one of the RA’s (the fund value was less as it still had a few years to run).

After his death we submitted the claim on behalf of his wife and received a recognition of transfer for an amount of R164000. We queried this with the company and were given the usual nonsense about the actuaries having calculated the values etc. We were not happy with this an insisted on a detailed explanation for the discrepancy in the values (this was in the form of at least 5 phone calls as well as 3 written requests).

Good news is that we have just received a revised recognition of transfer with a new amount of R247000 – that’s 50% more than the first one!

Still no explanation of how the value was calculated and no apology. I think we will take the money and run and then follow up later with a further request for a detailed explanation.

Now, imagine that this was a direct client with no advisor fighting for her – the insurance company concerned would probably just pocketed the extra money and the client would have been none the wiser!

The future of RA’s looks bleak…

Gregg — Thu, 25 Aug 2011 17:50:01 +0000

…in my opinion at least!

I cant understand the motivation behind treasury and the FSB’s latest (very zealous) implementation of the regulation 28 rules that apply to retirement funds.

These rules have a whole host of unintended consequences, not least of which, will probably be that RA’s are no longer used as savings vehicles and especially by younger people.

First a brief bit of background:

The Prudential Investment Guidelines (PIGS) are part of Regulation 28 that has been applied to pension funds and how the assets can be invested. Without getting into too much detail, the past rules stipulated that in terms of PIGS, funds could have a maximum equity exposure of 75%, property and equity was limited to 90% with the balance of the funds being invested in the other asset classes (bonds and cash). Typically “pension” funds have tended to sit with around 65% in equities, 10% in property and the balance of the assets in bonds and cash. On top of this, funds were allowed to have up to 25% of their assets invested offshore.

Now most companies tended to allow individual investors to do as they please so long as the fund as whole complied with the regulations. In practise this meant that because some investors were more conservative and had most of their money in bonds and cash, others could be more aggressive with some investors (typically the younger ones) having 100% in equities. The same applied to the offshore exposure. This seemed to work fine for just about everyone. Or so it seemed…

However, recently, the national treasury and the FSB saw fit to amend Regulation 28 (I still cant figure out why) and the worst part of the amendment seems to be that they want each individual member to comply with the legislation with some talk of them even forcing members to comply. This could mean that the companies would be forced to switch some individual members funds until they comply (that could be a legal nightmare). Talk about big brother watching you!

Going forward, 2 of the unintended consequences that I can already see are as follows:

Anyone who has an existing RA will have to make sure that it complies with the regulations before they can add to it (this will even apply if they want to increase an existing debit order). Practically this will have the following effect: I have an existing RA where the equity exposure has grown to 78% and the offshore exposure is sitting at 30% of the fund. I am happy with this but I will now not be allowed to add to this RA fund unless I reduce the equity exposure to 75% and the offshore exposure to 25%. Now there will certainly be times when this might be appropriate but there are also times when investors will not want to reduce equities or their offshore exposure (for example when the market is weak and the rand is strong – it would be a classic case of buying high and selling low – and this enforced on us by the regulators!). The practical solution will be to leave the existing RA as it is and start a new RA at a different company. This exercise could be repeated each time investors want to add to their RA’s and it is not inconceivable that they could end up with 10-15 different RA’s at 10-15 different companies over the years – this is an admin nightmare for everyone.
A second unintended consequence will be that younger investors who up until now have been able to invest 100% in equities will now shun RA’s in favour of discretionary funds where they can determine their own asset allocations. Sure there are no tax deductions and they will probably end up accessing the funds before they retire but that’s what you get when you try to force an inappropriate situation onto people. Why should a 30 year old investor with 35 years to go until retirement not have 100% in equities if she wants to?

I cant see why the new regulations have been introduced and more specifically why they seem hell-bent on enforcing them at individual investor level – it is certainly not about protecting investors from themselves – under the new rules, it is now possible to have 75% of your fund in equities and the remaining 25% in property – that is certainly not lower risk than the previous guidelines and will certainly mean more volatility for anyone who opts for this route. So what are the real intentions behind this all?

In our practice, we are very close to advising investors to stay away from RA’s until they are ready to retire – at retirement age they could transfer their discretionary assets into an RA. Under current legislation this would have multiple tax benefits for them.

Is anyone at treasury or the FSB listening to investors?

This article appeared in Finweek on 14th October 2011

Worth the read…

Gregg — Fri, 12 Aug 2011 09:35:36 +0000

I came across this post by Kokkie Kooyman from SIM (Sanlam Investment Management). He has twice been rated as Investment Week’s Global Fund Manager of the year and this is well worth the read. It is a good take on what is happening in the global economies…

http://www.sanlam.co.za/wps/wcm/connect/2408bd0047ebbffebca8beb4ae0d5b11/SIM%2BGlobal%2BMarket%2BReview%2BAug%2B2011.pdf?MOD=AJPERES

You can fool some of the people some of the time…

Gregg — Wed, 13 Jul 2011 07:39:42 +0000

I see that union members are striking over what they perceive to be an unfair wage increase offer of around 7%…they want somewhere between 11 and 20% (depending on who you read) while the official inflation rate is closer to 4%.

On the face of it their demand seems unreasonable and their rejection of the increase which is already 3% more than inflation also seems ungrateful…or is it?

The problem we have (and that the Reserve Bank has) is that hardly anyone believes that inflation really is 4%. This may be the official figure as released by Stats SA and it may be the measure of the change in the “inflation basket” but for most people in South Africa, that basket is a theoretical one which bears little resemblance to reality for ordinary people whose cost of living has increased by much more than 4% pa.

At 4%, the official inflation figure is unbelievable and does not reflect the actual year on year increases for the average South African. No wonder the unions demand more…I would too!

A great way to save?

Gregg — Tue, 12 Jul 2011 07:02:02 +0000

Heard a radio ad this morning for RSA Retail Bonds…it went something like this…“There’s no fees or commissions therefore it’s a great way to save”. I disagree strongly with this statement – it is not a great way to save.

It is a great way for people to generate income – at 7.25% for 2 years it is still the best rate out there, but as a long term savings product it is pretty poor. Even at 8.25% the 5 year rate is way below what you could reasonably expect from a balanced fund and the All Share index generated about 11.5% pa for the past 5 years.

I have long been a fan of the RSA Retail Bond and still am for people looking for income but as a savings option I think that it is pretty poor – you can do significantly better over the long term – even after fees and commissions – if you are prepared to put up with a bit of volatility risk.