Craig Turton, Certified Financial Planner® and MD of Chartered Financial Planning, shares the wisdom of focused saving.
Julia is just the kind of investor a financial planner appreciates.
Julia is a single woman who holds a management position within a media business. She travels extensively for work and puts in long hours.
Having started with a R9,000 a month salary, and having been my client for 15 years she now has a balance sheet in excess of R5million.
How has this 37-year old client created such substantial financial security?
She has chosen to place the majority of her assets in investments rather than lifestyle assets. An investor will potentially live off the growth of the investment one day; a lifestyle asset usually depreciates and is earmarked for lifestyle use – it is not included her investment assets.
In my experience, many clients invest more heavily in lifestyle assets such as large homes, flashy cars and holiday homes. In contrast, Julia, from her first pay cheque, determined her level of comfort required to make her happy – this is her lifestyle ceiling. Once she reached this level, she began to invest in investments rather than lifestyle elements.
At a price …
At each of our financial planning meetings, and checking her new asset value, Julia gains confidence to keep doing what she is doing. She is often concerned that her friends don’t know how well she really has done through investing. She is happy to share but is seldom asked.
Julia is by no means ‘stingy’, and enjoys time out with friends, usually paying for more than required. An avid golfer, she has travelled to some top international golf courses. She has found the balance to live happily now but also save for the future.
Reasons for her success
- Having been employed at the same business for 14 years, Julia has kept her Pension Fund contributions in place. This is called compulsory saving. Often, when leaving an employer, employees will cash in their Pension Funds to fund their lifestyles or an entrepreneurial endeavour. Julia has already determined, should she resign, to transfer her Pension fund so it remains a retirement asset, whether into a Preservation fund or to her new employer.
- Her father convinced her to save from day one of work into a unit trust – it has now grown to R563,000. The key to the unit trust investment is being well diversified in the investment and never trying to time the market or change managers. She has stuck to investment strategy we selected.
- Julia has lived in the same property since age 23. Purchased for R800,000, it is now worth R1,650,000, and was paid off over 14 years by transferring her bonuses every year and an extra few thousand every month. This was a focus for Julia.
- Julia bought a rental property three years ago, knowing there was huge potential for a corporate rental; the property was in a growth area so she decided to invest. She bought for R750,000 and three years later it has grown in value to R960,000. The rental yields R7,000 per month in income which more than covers the bond. Julia has used all her surplus monthly cash to lower the bond to R344,000. I have advised her that settling her bond 100% would affect her taxable income as there would be no interest to offset the income. Sometimes having a bond on a rental property is a good idea due to tax. We have agreed to adjust her thinking by rather focusing on building up enough of a lump sum to transfer offshore. This is one area where she is lacking.
Through her employer, Julia has accumulated R747,000 in share options. She will have to realise these shares in 2018 as part of the share agreement. She will need to pay some Capital Gains Tax on the proceeds and once she has the funds in place, we will add a portion to her new offshore investment and a portion to a new well-diversified share portfolio.
She had a Retirement Annuity to which she was contributing and has built up to R344,000. We stopped these contributions four years ago as she was not getting the deduction on the premium. Even though she can now contribute again and get the deduction, we decided rather to focus on offshore and creating more liquidity in her portfolio. This forms part of her retirement strategy.
Julia spread her risk between assets. Her share portfolio and properties would be regarded as growth assets and ‘risky’ for some. But over the last 14 years, the ‘risk’ has paid off. She has invested in the most risky fund she can with her Pension due to her age and time to retirement, with regulation 28 a factor. This is probably regarded as a moderate risk. Her Retirement Annuity is invested the same way.
Her emergency fund is in a cash account as she understands there should be no risk associated here as she could draw on it anytime. Her unit trusts are invested in a strategy targeting 6% above inflation over a seven-year period. Since inception, this investment has performed according to its target, even though in the last two years it has performed below inflation.
With this is mind, Julia has stuck to her investment strategy and has not disinvested or thought of moving to something more conservative. She understands and is comfortable with this short-term underperformance, knowing that the markets turn, and these returns will improve.
Over the past three years, in a tough economic environment, Julia’s balance sheet has grown on average by 14%. At every meeting she asks me if she is on track for retirement, should she buy a new car, and so on. Her salary is R47,000 per month before tax.
At age 65, her retirement assets will have a current value of just over R10,000,000 in today’s terms. This will offer her R50,000 per month with little risk of the capital depreciating. Julia loves what she does and may work to age 70.
- Emergency fund: R110,000
- Unit trust with a monthly contribution of R5000 to R563,000
- Nissan: R67,000
- Primary residence which is paid off: R1,650,000
- Rental property with a corporate tenant: R960,000 (rental income of R7000 per month)
- Company Pension fund: contributing 15% to the Pension Fund and value at R732,000
- Share portfolio: R747,000
- Retirement Annuity: R344,000 (no contributions)
- Debt: R344,000 on rental property
Takeaways: remain invested, keep to investment strategy, understand the key component of diversity, use tax incentives.
Julia thinks about her investments but is not tempted to move or change. Her decisions are now around where she invests new money.
Of course, Julia is not married and does not have the expense of children. Her investment will need to be adjusted when this time comes but not for now. She has done the hard yards with her investment, and compounding on her investments will stand her in great stead even should the cost of parenthood arise.