| I know you might think this topic strange coming from a financial planner – why would I outsource my job and encourage clients to do it on their own? Look, this probably isn’t going to make me popular with my fellow planners and advisors, but unless you have significant investable assets that the planner can manage for you, you’re probably going to find it difficult to engage the services of a quality long-term planner. This can be a problem if you have most of your assets tied up in a company pension fund, and don’t have much of a need for life/ disability/ dread disease insurance. You can of course find a planner who will do a ‘plan for a fee’, while better than nothing, I am not a huge fan of this approach because it is expensive, requires ongoing monitoring and evolution to be successful and if you don’t have this ongoing tweaking, every day from the day the plan is handed over it will start to deviate from the optimal outcome. Over time, this sets up both client and planner for failure – through no fault of their own. To help you kick start your own plan I’m going to walk you through the first few steps in the six-step process most planners use.  Discover and organise: If you’ve been reading my posts for any amount of time, this is not going to come as any surprise. Uncomfortable and as boring as it sounds, you have to know where you stand financially right now. There is no getting around it, and guess work is just not good enough. My RedFile organisational system is still available free on request and includes pre- and post-retirement income statement (aka Budget) and Balance sheet (aka asset and liability register).  Analyse. This is a multi-part exercise. First you should optimise your current situation. The before and after retirement ‘budgeting’ exercise is probably going to identify some areas that you can work on immediately – over/under insurance, poor tax optimisation, forgotten debits, unused subscriptions etc. I recommend you go to the trouble of using all your credit card and banking statements for as long as a year to get an accurate picture (once you have the basic framework, it isn’t as onerous as it sounds). Once you have those budget items categorised and organised, you could enter them into your banking app’s budgeting feature that most of the top tier banks have these days. The post-retirement budget should be done at PRESENT VALUE, don’t worry about variables like inflation at this stage. The bottom-line number you get from this exercise – the before tax income needs per month is CRITICAL. (https://www.taxtim.com/za/calculators/income-tax is a great calculator to work out the ‘before tax’ income). If you’re married and likely to stay married, then it’s advisable to do this together and optimise the tax and allowances between the two of you. It will form the backbone of the rest of your retirement planning (and ultimately also your estate plan). I know that we’re now starting to get into higher grade math territory here – but if you want to DIY, this is what needs to be done (or done for you). I think there is a misconception out there that financial advisors and planners are just life insurance salesmen that have got too big for their britches. But having done both an MBA and CFP® (Certified Financial Planner, the equivalent of, say, a Chartered Accountant over a bookkeeper), the CFP® was a really tough certification, and requires ongoing learning research and keeping up with markets that change on a daily basis. Ultimately, having a professional financial planner in your corner – even if it is just at retirement, goes way beyond what they charge in fees, and how your portfolios perform (which is a function of the markets, asset allocation and time in the market more than anything else anyway). In my experience, it is how much I have saved my clients in every aspect of their wealth portfolio – from medical aids, life insurance through investments, estate planning and even day-to-day consumption patterns – that has made the biggest financial impact.  There are other objectives you need to consider in the pre-retirement phase, especially around paying off debt and long-term financial obligations (for example to elderly parents or children who refuse to leave the nest). If you can at least get to a simple financial objective like this: My objective at retirement age ________ is to have a (present value 2025) before tax income of ____________ per month, growing at inflation for the whole of my life/our lives. This translates to a (PV) capital pool of Rx, which will be drawn down at x% per annum. This before tax income will come from the following sources: (List: Compulsory Annuity Rx per month, Flexible investments Rx per month, Rental income Rx per month, Other Rx per month). Okay, it doesn’t look that simple – but it is what you need for the start of a DIY plan that is going to hold water. Print it out, put it in your RedFile and update it every year and see how you do. Just that simple step will put you ahead of 99% of your peers who are just winging it. If you do decide to get a Planner involved at some stage, then a lot of hard work (which you’d have to do anyway) will be done, and they can fine tune some of the higher-grade stuff, do the tax planning and run scenarios for you. Once you get to the retirement ‘event’ please do not try to DIY, take some EB Broker or HR nominee’s advice. Make sure the advice you’re getting is independent (not tied to a single insurance company). This is a huge decision, has long term income and tax implications and decisions made often cannot be reversed. These objectives are the hard stuff, the soft stuff is just as important – WHAT do you want to do in those decades post-retirement. Some of these will have financial implications of course, but planning for a purpose beyond earning is known to have an impact on your longevity.  Develop: Once you have your ideal retirement income number buttoned down, now the fun (or, often, not such fun) stuff can begin. The easiest one to work out, is “What if I were to retire right now”. This would just be a matter of transforming the capital you have invested into an income – before tax. It’s a pretty crude number, and you’re going to need to do more math and accounting to work out the ’bucks-in-pocket’ number after tax, but it’s a good start. The sweet-spot for drawing down on a capital investment to produce an income is somewhere between 4,5%-5% per annum (on the lower end when interest rates are low, on the higher end when they are higher – we are about in the middle now, say 4,75%). So, if you have R1m in capital, drawn down for an income at 4,5% pa you can draw down an income of R3,750pm, increasing annually with inflation and it should last you the whole of your life, even if that is over a hundred years old. Unless you’re about to retire, this number is just for fun (or to give you a heart attack). A fully fledged retirement plan of course goes way beyond this and there are many more variables you have to consider : Retirement age, Full or semi-retirement, inflation assumptions and growth assumptions (to get ‘real’ growth – some categories like medical aid has a very different inflation and needs to be treated separately), current contributions and how these may need to be changed to achieve income objectives, tax (and the changes after 65), estate duty and planning, long term potential critical care and end of life expenses, large capital lumpsums required (cars, relocation), What blend of investments to use (Retirement funds, flexible, local/offshore) – each of which is treated differently by SARS.  Steps 4,5 and 6 are probably more related to a professional planner looking after a client’s portfolio – Presenting the recommendations, implementing the plan and monitoring its progress (which will be job if you do it DIY). So in short, if you for some reason are not engaging with a financial planner, start the process on your own. I am more than happy to share my RedFile system which will be a great start. Button down some of the detail discussed above and start peering into what your financial future could look like. At the same time, why not join our mailing list where we discussed anything that is pertinent to money and politics. (just drop me an email dawn@rexsolom.co.za for either/both). It could only give your more insight and help you start building up your investment and planning skills. I will be expanding on this ‘DIY plan’ in future posts – which you’ll be able to get here, or sent to you direct if you’re on the database. Articles and Blogs: To catch a falling knife NEW Income at retirement NEW 2025 Budget Apportioning blame for your financial state Tempering fear and greed New Year’s resolutions over? Try a Wealth Bibgo Card instead. Wills and Estate Planning (comprehensive 3 in one post) Pre-retirement – The make-or-break moments Some unconventional thoughts on wealth and risk management Wealth creation is a balancing act over time Wealth traps waiting for unsuspecting entrepreneurs Two Pot pension system demystified Keeping your legacy shining bright Financial well-being when dealing with Dementia and Alzheimers Weathering the storm Pruning your wealth farm Should you change your investments with changing politics? Taking a holistic view of your wealth Why do I need a financial advisor? Costs Fees and Commissions The NHI and what to do about it New-Normal for Retirement? Locking-In Interest rates – The inflation story Situs – The Myths and Reality Tax Residency – New Rules new headaches Are retirement annuities dead A new look at retirement Offshore investing – an unpopular opinion Cobie Legrange and Dawn Ridler, Rexsolom Invest, Licensed FSP 45521. Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za Website: rexsolom.co.za, wealthecology.co.za |