Category: Chartered Wealth Creation

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Wealth protection – how much is enough?

Purchasing any type of insurance policy is often regarded as a grudge purchase, as you can only claim against this policy should a specific event occur. One has to weigh up the likelihood of encountering such an event in deciding whether to insure against it. In most cases, we would look at the financial risk that an event may pose on your wealth or your family’s wealth; subsequently, we would build a wealth protection plan for you to ensure these financial risks that you consider to be of significance are protected against. Although insuring your belongings tends to take priority over insuring your life or ability to work, in this article, we will discuss the latter as these events tend to be far more financially devastating.

I am often asked how much life cover or disability cover should one have? How much is enough? The answer is simply that there is no one size fits all. Due to the uniqueness of each individual’s situation, we must ensure that we run through a wealth protection process to determine what benefits are needed and how much cover is sufficient, depending on your specific needs. We, of course, do not want to be overinsured, but just as critical, we must ensure we are not underinsured.

To answer the question of “how much is enough”, there are some factors that you need to consider through the wealth protection process, and from this, using our financial planning tools, we will be able to ascertain how much cover you should put in place. These factors include:

  • Your financial and family situation
  • Your financial dependents and for how long they are dependent on you. For example, providing for a six-year-old child in the case of your death is far more onerous than a 16-year-old child
  • Your cash flow needs (and how long these need to be met), such as:
    • Living expenses
    • Medical aid
    • Children’s education costs
  • Your spouse’s ability to earn an income
  • Outstanding debts
  • Current asset base
  • Where will the proceeds be invested to ensure longevity

Once we clearly understand your financial and family circumstances and what you consider the most critical risks to be covered, we can look at the different types of insurance available.

  • Life/death cover
  • Lump-sum disability cover
  • Dread disease/critical illness cover
  • Income protection for temporary and permanent disablement

Once we have decided on the amount of insurance and which types of insurance you will be putting in place, it’s vital to review this on an ongoing basis as your circumstances are continually changing. For example, as you gradually settle debt and your financial dependants get older so, the amount of cover should be adjusted. We tend to find that once debts are settled, and children are in the workplace, the need for these various types of insurance falls away, which is why most retired clients do not have life insurance. Please get in touch with us should you have any questions.

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Managing money in your 40s

As we come to the last part of our series, we find ourselves slightly busier in all aspects of our lives. For many of us, we are living in our family home (with lots of DIY projects on the go), making sure our children are on course with all their academic and sporting schedules, making waves in our careers (hopefully getting some well-deserved bonuses), trying to balance the social aspects and making some time for a relaxing beach holiday (or ski holiday, if you already have a sun-kissed tan).

We have now built the financial foundations and formed our healthy financial habits, which puts us in good stead for our 40s, and then, when the mid-life crisis hits, there won’t be any money problems to worry about.

Here are some tips to assist you in navigating through your 40s, some of which might follow on from my previous articles:

  • Add to your RetiremeantTM savings and make tax work for you. Any contributions added to your retirement funds (pension, provident and/or retirement annuity) may be deducted against your taxable income (up to prescribed limits). You will essentially be getting tax back for being disciplined and committed to your Retiremeant™ plan. On top of this, you will be adding to your retirement pot which will mean more compound interest (interest on interest).
  • Add liquidity to your RetirementTM plan. A common phrase we use in our industry is: “pension rich, cash poor” – this refers to clients not having liquidity to pay for bucket wheel items in their retirement years such as new cars, annual holidays, children’s weddings, give back to charities, sporting events etc. A lack of liquidity planning can lead to cash flow challenges, and we, therefore, suggest chatting to your Retiremeant™ specialist on the best way to structure your plan to cater for this need. Typical investment vehicles for this would include tax-free savings accounts, unit trusts and endowments.
  • Save interest on your bond. By adding an extra R1,000 into your bond every month, you can not only shave off several years, but you can also save a massive amount of bond interest, which will mean the banks won’t be declaring huge dividends cheques to their executives.
  • Speak to your children about finances. Children look to parents for cues on how to behave, and money habits are no exception. A big part of teaching our children healthy financial habits is making sure you’re modelling them yourself. Let your child know the expectations and norms around money in your family by setting easy-to-follow examples.
  • Update and polish your Will, wealth protection and estate plan. In my previous article (Managing money in your 30s), we spoke about getting these structures in place to ensure your wishes are met when the time comes. We now have to update and polish all these components as circumstances change, so make sure that you have the correct beneficiary nominations, your Wills are correctly signed and valid, and your life policies are consistent with your needs.
  • Find some balance. Amid all this financial jargon, discipline, financial habits and responsibilities, it’s essential to find balance amongst all the ‘adulting’ and take time to spoil yourself (and your family) with the money that you’ve worked so hard for. Be it a spa day, playing golf or even a trail run in the Berg, we must not forget that life is short, and balance will keep you sane.

We’ve now done the hard part by being consistent, disciplined and forming healthy financial habits over the last two decades. As we enter the 2nd half of our financial journey, we should carry on building onto our financial plan and take one of Zig Ziglar’s quotes into consideration: “Expect the best. Prepare for the worst. Capitalize on what comes.”

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Managing money in your 30s

Following from my previous article, ‘Managing money in your 20s – where do I start?‘, we now find ourselves a decade down the road and starting to wonder what we should be doing next, now that ‘adulthood’ has approached. We have different transitions that need to be considered and planned for. For many of us, this phase in our lives is where we get married, start families and progress in our careers.

Here are some tips to assist you in managing your money through your 30s:

  • Boost your emergency fund – in our 20s, we started building an emergency fund for those small emergencies, but now we have larger and more expensive responsibilities, which we need to protect. Ensure you are adding to your emergency fund to cater for four-six months’ worth of expenses.
  • Don’t overspend on a house – as we progress in our careers; we tend to build up our remuneration – the one mistake we make is upgrading our living standards the more we earn, and the most common thing we do is buy a bigger and better house which dries up our extra cashflow and prevents us from working on our other financial objectives.
  • Diversify your investments – as your investment and financial plan gains traction, we now need to diversify and ensure all our eggs are not in one basket – we need to ensure that our hard-earned money is placed all around the world, in various sectors and industries to reduce the risk and volatility in our investment structures.
  • Start an education fund – family planning is an exciting part of our lives, but should we not adequately plan for it, it can come back to haunt us. Make sure you begin saving for your children’s education the day they are born so that if they want to study at Harvard and become the next Harvey Specter (sorry, I love the series ‘Suits’), you can provide the funds without exerting pressure on your cashflow.
  • Make sure your risk and wealth protection plan is updated – now that we have more family responsibilities, we need to make sure our loved ones are protected in the event of death, disability and/or dread disease. Make sure you have cover in place that will cater for their needs and objectives – it’s also critical that you are not overinsured and paying unnecessary premiums.
  • Prepare an estate plan and implement a valid Will – it’s vital to ensure your wishes are met should something happen to you – we also rarely ensure that there is enough liquidity in our estates for those ‘unforeseen’ estate expenses such as estate duty, tax compliance, capital gains tax etc.
  • Build onto your RetiremeantTM savings – building on from the last decade, we must not forget to be consistent and disciplined with our Retiremeant™ savings – this is where we will start seeing the benefits of compound interest.

These are the years to build on our foundation when we started our financial habits back in our 20s. Warren Buffet’s quote sums it up quite nicely: “Someone is sitting in the shade of a tree today because someone planted a tree long ago”.

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Managing money in your 20s – Where should I start?

Getting started on sorting out your personal finances is an overwhelming task. There are so many life transitions that will have financial impacts on us in our 20s. To name a few: finishing university, starting a new job, earning our first paycheque, buying our first apartment, and if we were lucky enough to find love early on, getting married. Apart from feeling overwhelmed, it’s difficult to know where and how to begin and who to seek advice from.

While we are young, it’s important to start building solid financial habits:

  • Pay Yourself First – you are the centre of your financial affairs, so that means you should always invest and pay yourself first. As Warren Buffet says: “Do not save what is left after spending, but spend what is left after saving”. Set a goal to save 10% to 20% of your income each month to put toward your long-term priorities.
  • Create and stick to your spending plan – one of the simplest, yet most admin intensive tasks (from my own experience, even though it took me less than 20 minutes) was to create a spending plan. It’s a very powerful tool that allows you to see what’s coming in, what’s going out and enables you to manage your cash flow accordingly. This should be reviewed at least annually, or when a big item has been added or subtracted.
  • Create an emergency fund – save and put away three months’ worth of expenses into an easy-to-access account, so that you’re prepared if disaster strikes. Don’t be discouraged if unexpected expenses force you to tap into this fund, that’s what it’s there for. Much like our spending plan, the goal amount shouldn’t be static. It’ll rise or fall as your circumstances change.
  • Protect your wealth and your health – never say never, tragedy can strike anyone at any time. It is important to have enough cover in place, but to not be over-insured. Ultimately, your current circumstances will determine what cover is needed, but as a minimum, you should have income protection (disability cover), medical aid, and gap cover in place.
  • Build a healthy credit score – building and having a good credit score, will allow banks/institutions to grant you a loan at a lower interest rate when you need it. To start building your score, pay back the full amount due on your credit card, store accounts and cell phone contract every month and on time.
  • Start saving for RetiremeantTM – I know RetiremeantTM seems like forever from now. However, it’s more important than ever for us to focus on this investment goal as soon as possible, and ensure we have exposure to growth assets, such as equities, offshore and property. This positions us to beat inflation over time and not go backwards in real, purchasing power.

As with all things in life, these habits may seem overwhelming at first but will become easier and easier as and when we get more familiar with them, and it is essential to get them in place as soon as possible. I think Benjamin Franklin said it best, “If you fail to plan, you are planning to fail!”.

Podcast

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Money habits – Going back to Basics

We all have our own money story; we call this our relationship with money – this is shaped by our values, history, what our parents and grandparents taught us, experiences and general money habits. As Covid-19 has hit hard throughout the world, it may be a good time to sit back and try and understand what our relationship with money is, and whether or not this has changed over the last few months.

Do we have money habits that have been shaped by our history? Will these habits enable us to become financially free, or will they steer us into a never-ending money trap?

What if I told you six months back that Covid-19 was coming in 2020? That the stock market would be down 35%, and your salary would be cut by 20%? Would your money habits have changed, or would they be the same?

We’ve had numerous discussions with clients around this topic. On the one hand, clients have had to completely review their money habits – they have done a complete 180. On the other hand, we’ve had clients who have been unaffected, because they have ‘prepared’ themselves for black swan events such as this; they have not overextended themselves and know about every cent that goes in and out of their accounts.

In a time of panic and uncertainty, as is the case now, it’s extremely important that you go back to the basics and do a quick reflection about your own money habits. This will be different for each one of you, depending on which phase of life you are currently in.

Here are five tips to help you manage your money during this time:

  1. Take some time to revise or redo your budget – it’s vital that we understand what comes in versus what goes out and whether we are living within our means – we should be updating our budgets at least once a year, or when a material financial transition occurs.
  2. Remember to pay yourself first – you are investing in your financial freedom, and this should be on the top of the list.
  3. Pay off short term, high interest-bearing debt.
  4. Do not go into debt to maintain your lifestyle – this short-term gratification can have disastrous effects for your long- term goals.
  5. Last, but not least, don’t panic – although uncomfortable, it’s critical that we do not make emotional decisions and stick to our financial plan and investment strategies.

We are living in a time of chaos, and it is uncertain and uncomfortable for us all, but by understanding our relationship with money and tweaking our money habits (or even keeping the same), we can ensure we get through this pandemic stronger, and wiser.

Podcast

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Different life stage, different risk

Craig Turton, Head of the Wealth Creation team at Chartered Wealth Solutions, explains that each new life stage comes with its own risks, and a comprehensive Financial Plan takes all of these into account. Check your own list as you read through the article.

When you were a fresh graduate in a new job, you possibly shared a small dwelling with two roommates, had a second-hand car and three neat work outfits that you laundered carefully. With no dependents, your financial priority in terms of cover was short-term insurance for your car and some personal possessions.
Now you are a parent, with significantly more expensive assets, and have many more financial responsibilities. Not having enough cover can jeopardise you, your lifestyle and your dependents’ wellbeing.

Risks associated with each life stage

Within our Wealth Creation team, we see clients of different ages and in different stages of their lives and careers.

A complete Financial Plan should include the risks associated with being at these different stages. Risks include such unexpected life events as:

  • death
  • disability
  • loss of income
  • severe illness

In this article, we touch on potential risks in the different stages of our lives and career. It’s important to note that medical aid is excluded from the risks below, so we must ensure that, at all life stages, our medical aid covers what we need it to cover.

Student

If you have student debt and you pass away, your family will inherit your debt. The solution would be to have some life cover in place to protect against this debt.

Young, single work-starter

Be aware of debt, such as study loans, as indicated. Your biggest asset at this time is your ability to earn an income. Consider the implications of not being able to work. Protect this ability through an income disability protection policy – your Financial Planner will be able to advise you.

In a committed relationship or marriage

If you buy a home together, ensure the bond is protected through a life policy. While it’s not romantic, it is caring to have a formal contract in place between the two of you, to make provision for the possible dissolution of your relationship. Ensure your Will stipulates what should happen to your share of the house in the event of one of you passing. Growing up is not easy and the conversations just get harder, but it is essential that you have them.

Married and considering having children

If you are both are income earners, will the survivor suffer financially without that income? If yes, you need to make sufficient provision to allow the survivor to maintain their standard of living. Education is a huge cost for one parent, so include this cost in the calculation.

Peak of your career

You may suffer a health risk; a severe illness benefit will assist with the financial demands of such an illness. An estate plan should address the costs in your estate when you die. Ensure your beneficiary nominations are correct and updated on your policies and retirement funds. Make sure your children will have sufficient capital to see them through varsity when you are no longer there.

Retirement

A goal here may be to be relatively or completely debt-free by this stage; if not, ensure you have covered the remaining debt. Your Will should be up to date. A severe illness benefit is likely to be very relevant. In your Financial Plan, consider the costs of long-term care for when you are less independent, such as assisted living, frail care or in-house caregivers.

Finally …

If we live, we have risk. These risks need to be planned for and managed. Most importantly, having planned, live in the moment and enjoy each day you have with your families and loved ones.

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What you need to know before cashing in your Pension or Provident fund

When you are leaving your employer, you may wonder what you should do with your Pension and /or Provident Fund.

The option of cashing in

Can you withdraw your retirement funds before you retire without being penalised?

The simple answer is yes, but be aware of the risks.

Living costs have gone up, with debt levels rising as a result. Household cashflow may be under pressure, and job security is an ever-present concern. These are all valid reasons to access some (if not all) the funds in your Pension Fund when leaving an employer.

Cashing in your retirement savings prematurely has a double cost: you reduce your tax-free lump sum when you retire, and you pay more tax on your retirement savings.

When you resign, you are allowed access to only R25,000 tax free – a SARS regulation. Any amount over that is taxed at a significant 18%. Withdraw more than R660,000, your tax rate is 27%, and 36% on amounts over R990,000.

Let’s look at an example. You are changing jobs and want to cash in a R400,000 pension fund. You will pay 18% tax on R400,000 minus R25,000 (your allowed tax-free amount). So, you will pay R67,500 to SARS.

Should you withdraw again on your next resignation … well, you can imagine the impact on your long-term savings. Please note that R25,000 tax free amount does not apply to every single withdrawal. On every pre-retirement withdrawal the amount will get aggregated to the previous withdrawal, and you’ll end up paying more and more in taxes.

The reasons for staying in

If you reach retirement, the retirement tax tables apply – that is, the rate of tax is determined by the taxable income. If you waited until retirement to cash in, your first R500,000 is tax-free.

South Africans are notoriously poor savers and our retirement statistics are poor. Only about 6% of South Africans retiring can afford to do so at age 65. A major contributor to jeopardising your financial wellbeing is the repeated drawing of retirement funds when leaving employers.

A full transfer from your retirement savings to your living annuity means no tax implications.

Avoid borrowing from your future.

Preserve your retirement funds for retirement. It’s not that far away!

Emigrating?

South African citizens who emigrate are entitled to have their pensions paid to them in their country of emigration, or they may choose to take the amount in cash. If you emigrate before you retire, you may withdraw all your pension or provident funds with no penalty.

You know that you may not withdraw from a Retirement Annuity before 55, and, on retirement, may access only one-third of your funds. The rest buys a pension. If you emigrate, however, you may take the whole amount in full. From 1 March, 2019, the same concession applies to members of pension provident funds. Provident pension members can take their whole amount in cash.

It’s important to note that relocation is not emigration, and, without formal emigration, the usual tax rules apply.

This information is particularly relevant in light of reports of increasing numbers of South Africans considering emigration. For Craig Turton’s message on choosing to stay in South Africa, click here.

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South Africa’s future: choose your focus

“Just do something” is the current cry rising all over South Africa.

The appeal for action has gained volume and momentum in the wake of recent violent attacks across the country, with xenophobia and gender-based violence being cited as reasons for the recent spike.

Of course, the call for action is directed to the man in power: the country’s president. Cyril Ramaphosa’s reaction to the attacks on women and children was first articulated at a BrandSA breakfast, before a Cabinet meeting where the urgent matter was promised to be raised. While his response was widely regarded to be delayed, his message was strong, and he placed the responsibility firmly with men to own their role in stemming this tide of violence against women and children.

In my business and social circles, there seems to be a belief in the positive intentions of the President, but a general pessimism regarding the trajectory of the country. Certainly, the country’s leader is battling on several fronts, including persistent corruption within his own party.

Amid this uncertainty, and committed to the future of our country, I keep my radar up for positive moves that suggest a more sustainable future for us.

The clean-up continues

There are currently two commissions actively working to clean up and rebuild government. One way is to free critical institutions from the previous regime. SARS, the NPA, the Hawks, SAPS have all seen high-ranking officials departing and even arrests.

We recognise that our SOEs (State-Owned Enterprises) are in turmoil and are encouraged by processes underway to seek accountability, among which we find: Brian Molefe and Eskom; the PIC and the Mpati commission; Dudu Myeni and SAA. Transnet’s top five are gone and another eight on suspension. The Denel CEO has also gone.

A significant clean-up has been within the formerly bloated and expensive cabinet: 36 ministers now down to 28.

I take hope from this. Those we thought were untouchable are falling from grace. The commissions are slow but persistent. We are getting convictions. President Ramaphosa is placing a strong emphasis on our economic renewal – without that, we will not eliminate unemployment and inequities.

I am staying in South Africa. I believe in this beautiful country and choose to look at all the positives around us, without discounting the fact that we have a mountain to climb to make us a thriving South Africa.

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A Celebration of Excellence

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We are so incredibly proud of our very own Craig Turton! Craig was shortlisted in the top three of the Financial Planner of the Year award – a tremendous achievement. This recognition by the Financial Planning Institute of Southern Africa (FPI) is not only a verification of Craig and his Wealth Creation Teams’ outstanding work, but also testimony to Chartered’s philosophy to attract and retain the very best talent in South Africa.

Craig heads up Chartered’s Wealth Creation Team and looks after clients who are not yet ready to retire, guiding them in making sound financial decisions during the wealth accumulation phase of their lives. Craig believes that the key to financial freedom lies in Chartered’s RetiremeantTM Planning process, and applies the same holistic and integrated approach to his Wealth Creation clients. “We look after their financial health and empower our clients to merge their money with the life they envisage having,” says Craig.

The Financial Planner of the Year Award

Every year, since its inception in 2001, the FPI recognises one of its members as the Financial Planner of the year. It is the highest praise bestowed on Financial Planners in South Africa and represents the pinnacle of excellence in the profession. The award is not given lightly, and to be shortlisted as one of the top three entrants is an accomplishment that Craig can be very proud of.

The competition is demanding in standard and applicants undergo an arduous selection process that includes submitting Financial Plans prepared for clients and a site visit to the practice of the entrants. The final three entrants are then subjected to a gruelling panel interview where they have to demonstrate their knowledge and capability on a wide variety of topics, including legislation, industry trends and specialised financial advice.

Craig Turton has followed in the footsteps of John Campbell, who was a finalist in the competition in 2007 and won the award in 2008.

Congratulations on your fantastic achievement Craig! Your commitment, insight and enthusiasm are truly inspiring This recognition is well deserved and we are so proud of you!

The FPI is the South African qualifications authority and also controlling body for Financial Planners; and the only institution to offer the CERTIFIED FINANCIAL PLANNER® certification, upholding the professionalism, integrity, ethics and quality of advice offered by Financial Planners.

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Building our economic future … together

I write this article in the wake of the national and provincial elections in South Africa, the results enabling the ANC to retain its ruling party status, though significantly weakened. The next five years will reveal if the President and the ANC is worthy of this ‘second chance’.

In the slew of political and economic commentary that followed, I saw a tentatively positive response to the relatively orderly and incident-free voting process, with the Rand appreciating 20c (also attributable to global factors), RSA ten year bond yields improving nine points and the big banking shares rising between 3% and 4%.

As a Financial Planner focused on helping clients in their wealth creation phase, it is a matter of concern for me that almost 10 million eligible voters did not even register to vote. Given our country’s history, and the cost at which the universal right to vote has come, this apparent apathy is worrying. Of course, it may be argued that a reluctance (or refusal) to vote shows no confidence in any of the 48 parties. The pessimism can be understood: the ANC’s recent kleptocracy and pillaging, and the lack of credibility of the other parties.

That said, I am a firm subscriber to the view that our younger generations can shape the future of this country; and participation is personally empowering – be it in our country’s political elections or in shaping our personal financial futures. I believe that this is the time for younger generations to be active in building our nation.

How to be an active citizen

All eyes are on the President who, no doubt, helped the ANC stay in power. A good start has been Cyril Ramaphosa’s revival of the advisory unit to drive policy. The challenges, though, remain what they have always been: economic growth not entirely based on direct foreign investment, but on creating, in the words of Ronnie Kasrils in a Daily Maverick article: “ … industrial policy with teeth to reinvigorate production, giving rise to economic modernisation with jobs, and redistribution instead of austerity.”

Obviously, government must implement measures to regulate SOEs such as Eskom, SAA, Telkom, and Transnet. Government spending on employees needs to be revisited.

Large corporations are cutting back on staff, an indication of the slowing of the economy. While government is setting up policies to create jobs, we as citizens can lend support to the quest to bring economic stability by supporting local entrepreneurs and small businesses; mentoring and encouraging those seeking to create a local brand of excellence; as an employer, to transfer skills to employees and help domestic staff where possible.

South Africans have a dismal record of saving, and improving our savings culture contributes to a healthier national economy.

The role of Financial Planning

In times of economic uncertainty or constraint, planning our finances becomes paramount. Being strategic about spending, saving and investing means that our money works for us and is the means to supporting the life we want for ourselves and our families, as well as helping those who work for us and philanthropic initiatives.

One way to be strategic is to ensure that our money is wisely invested. In the past five years, I am pleased to see clients asking more questions about their portfolio and its composition.

Some clients have enquired about investing money offshore (outside South Africa). I always emphasise the need to diversify with my clients, and part of that is investing offshore, though political uncertainty is but one factor to consider. A diversified approach includes choice of asset classes and asset managers, economies, politics, currencies, and a much wider scope of investment choice. A significant consideration for me is not to have all assets exposed in one country.

Economic prosperity in South Africa will require more than the efforts of government – let’s respond to the President’s call: Thuma Thina: Send us.

Craig Turton is a Certified Financial Planner® and Head of the Wealth Creation team at Chartered Wealth Solutions.

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