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

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This artcile was published in Finweek 11 November 2011

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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

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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

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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).

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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!

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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!

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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.

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Among the clients I meet there is traditionally a deep suspicion of insurance sales people and often (in my opinion) this is appropriate. All the statistics released by the life insurance industry point to the “fact” that people are generally under-insured. This may well be the case but I cant help but be suspicious of an industry that points out the general underutilization of the very product that it sells. It may well be that people are generally under-insured but I also hold the suspicion that among those that are insured, there are many that are in fact, over-insured.

Over-insured? How is that possible?

In my experience the greatest area of over-insurance is around disability and specifically income replacement cover. The usual scenario goes something like this…

The client is employed and is a member of the company retirement fund which has an income replacement disability benefit as part of the scheme. Typically this is 75% of the pensionable income (75% is international best practice – income replacement is never supposed to be an incentive to sit on the beach when you could be working). So for all intents and purposes the client is then insured to the maximum that he or she can claim.

In cases of over-insurance, the client also has some additional income replacement cover that they took out years ago (when they were still studying). They have stayed on the scheme because of the promised bonuses that they will receive some time in the future or on the mistaken belief that they will get paid if they are disabled and submit a claim.

If there is a valid claim, they will get paid – but not by both schemes. At claims stage, insurance companies typically aggregate the income received from all sources and will pay the balance of the 75% of income. So here is the problem and the over-insurance. If the external scheme pays, then the company scheme will probably not (to check this you can write to the company scheme and ask them how they would treat a claim in the event that you were also getting a benefit from the external (private) income replacement policy. They will write back and tell you that they will probably not pay. Probably not? What a waste of money – especially when statistically, your probability of being disabled is around 0.4%*. So why are you paying a(n addtional) premium for something that will probably not pay. You are over-insured and are wasting money!

As I see it, your group scheme membership is compulsory while the private scheme is not. So get rid of the external scheme – even if it means that you will lose some of the bonus – you could invest that money and the premium you were paying and you would end up with a bigger lump sum in the future.

* see the post http://www.thefinancialcoach.co.za/2010/11/19/statistically-unlikely-but/

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“Professor Steven Friedman says while much of the public debate portrays Julius Malema as an immensely powerful figure, all the evidence suggests that he largely does what he is told by senior politicians – and, perhaps, business people in the ANC who may also help him to afford his lifestyle. “Whether Zuma is challenged for the ANC presidency next year will be decided by senior figures who will convey their decision to the league.” Friedman says this may be the most over-cooked story in South African history, and it’s not analysis or commentary it’s hysteria on the part of journalists and political analysts.”

And just before you sound off about him being naive or that he has blinkers on, pause for a second to consider just how emotional and irrational our behaviour as humans often is.

“Did you know that in the aftermath of the Japanese earthquake and subsequent tsunami in March of this year, another event passed largely unnoticed in the western world. It was a mania of epic proportions, yet only lasted a week or two. The Chinese public, in the mistaken belief that eating iodised salt would help to prevent radiation sickness, bought up large quantities of such salt. This together with speculative entrepreneurs buying tons of salt, drove the price up by at least 900% within a matter of days. It took repeated statements from authorities before calm was restored, despite the fact that Beijing is almost 3000km away from the Fukushima nuclear accident. But at the height of the mania, the public even took to buying stocks of soy sauce as a salt replacement.”

Thanks to Atlantic Asset Management for the bit above about the Salt Bubble of 2011

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