Category Archives: Finance

How to track with your retirement savings

In this advice column Aviwe Gijana from Alexander Forbes answers a question from a reader who isn’t sure if he’s saving enough.

Q: I recently turned 45 and am afraid that I haven’t been saving enough for my retirement. I currently have R600 000 in a retirement annuity and a small money market investment that I use for large expenses like holidays.

How do I know whether I am on track for retirement? And if I’m not, is it too late to catch up?

There are many issues one has to consider before retirement, such as: How much debt do I have now and will I have any remaining at retirement? Are my kids still at school and will any of them need financial assistance when I am retired?

The most compelling question for a retiree is however: Am I going to be able to afford to live a comfortable lifestyle off the pension amount I receive?

Situations are different for every one of us, which is why it is very important to sit down with a financial advisor well ahead of retirement age. This will allow the necessary time to determine if your income will be enough in context of the potential expenses you may incur during your retirement years. Expenses may include items such as groceries, medical aid, rent or bond and fuel or transport money.

When a client asks me if they have saved enough for retirement I can only give a comprehensive answer if I have the following information: their current income and expenditure, and their contribution rate towards their pension fund and/or retirement annuity.

In addition, I need to know their planned retirement age, marital status and number of dependants. I also have to have an in-depth discussion about the type of lifestyle they envisage having in retirement.

I then use all this information to inform our discussion around possible annuity choices, as this also feeds into whether the level of savings will be adequate. There are different ways to structure your income in retirement, and these come at different costs.

Based on the information the reader has provided, it’s impossible to say whether, in his personal case, he is on track. I would rather advise him to sit down with an adviser who would have the appropriate financial analysis tools at their disposal to come up with a comprehensive analysis. They would be able to calculate, based on his current level of savings and projected retirement age, whether he could retire with an adequate amount of savings.

Following that discussion, the reader could then take some remedial action if it’s needed. That could be in the form of additional contributions to his retirement annuity, increasing his savings period by planning to retire later, or by revising his expenditure.

Save enough for retirement if you only start at 35

Employees in their twenties could be tempted to postpone saving for retirement for a decade or two, arguing that they would make up the shortfall later on when they earn a bigger salary.

Even where young workers do save from day one, the fact that many people don’t preserve their retirement benefits when they change jobs, effectively mean they also defer saving for retirement. More than two-thirds of pensioners who participated in Sanlam’s Benchmark Survey 2016 indicated that they did not preserve their savings when changing jobs and it is no surprise then that only 35{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} of the same group believed they have saved enough for retirement.

A research paper by David Blake, Douglas Wright and Yumeng Zhang called Age-Dependent Investing: Optimal Funding and Investment Strategies in Defined Contribution Pension Plans when Members are Rational Life Cycle Financial Planners investigates a retirement funding model that spreads the income earned as smoothly as possible from the time an individual starts working until the day she dies.

Discussing the implications of such an approach at the launch of the survey, Willem le Roux, actuary and head of investment consulting at Simeka Consultants and Actuaries, said quite controversially, the model demonstrates that the member would save nothing before the age of 35, but from age 35 she would save every increase received above inflation towards her retirement.

“So you are basically capping your standard of living from age 35.”

However controversial such an approach would be, at the very least anyone aged 35 and younger has no reason to bury her head in the sand in the belief that retirement is going to be tough, Le Roux said.

“In fact, the future can still be very rosy.”

But postponing will come at a cost. Based on the average member, contribution rates could get as high as 35{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} by the age of 60, according to the model.

Le Roux said as an actuary he wouldn’t recommend that everyone under the age of 35 should contribute nothing towards their retirement.

Saving is a culture and it would be very difficult to start saving large portions of your income towards retirement when you’ve saved nothing for a decade.

It would also be extremely challenging to cap your standard of living from age 35.

There are also other factors to consider.

In South Africa, a member won’t be able to contribute 35{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} of his or her salary in a tax-efficient manner.

“You can deduct from tax 27.5{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} [of your] contributions and of course if you are a high income earner, you’ve got the R350 000 rand cap to worry about as well,” Le Roux said.

The model also suggests that contributions should be fully invested in equities until around age 50. After 50, the member should gradually start converting from equities into inflation-linked bonds and the equity exposure should reduce to between 20{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} and 50{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} by retirement age, depending on your risk profile.

“Now this confirms what I always like to say – that the secret to investing is addressing the right risk at the right time. Investing in equities addresses the risk of insufficient returns for the long-term whereas investing in inflation-linked bonds protects the income that you can purchase after retirement.”

In the local market however, Regulation 28 of the Pension Funds Act, only allows a 75{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} equity exposure.

“There are ways around it, but that is another challenge.”

Le Roux said it would also be difficult for the industry to communicate effectively with members about such an approach.

The graph below highlights the impact of various contribution strategies on a pensioner’s net replacement ratio (the percentage of the member’s salary just before retirement that she can expect to receive as an income in retirement).

Fire for shortfall on policies with guaranteed maturity values

Some investors who have received payouts from Old Mutual’s Insured Investment Plan (“Versekerde Beleggingsplan”) or similar Flexi policies may qualify for an “ex gratia” payment where the payouts differed from the guaranteed maturity values in the original policies.

Guaranteed maturity values are not to be confused with projected maturity values, which were frequently used as marketing gimmicks in the past. In most cases projected maturity values were based on growth rates of around 12{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} to 15{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}, resulting in more than double the guaranteed maturity values, creating the expectation that final payout values would be higher than the guaranteed maturity values, subject to annual premium adjustments. The Pension Funds Adjudicator questioned the usefulness of projected values some years ago and highlighted the problems caused by not adjusting projected future fund values to the realities of a lower-inflation and lower-return environment.

A Moneyweb reader, Jan Heyneke, who invested in three of the Insured Investment Plan policies with Old Mutual during the early 1990s, recently realised that the payouts he received fell well short of the “guaranteed” maturity values.

His policy documents stipulate that if premiums increased in line with the Premium Adjuster (“Premie-Aanpasser”) annually, the guaranteed maturity values would be applicable at the maturity dates.

It also notes that the total premium would automatically be adjusted with inflation annually “as determined by Old Mutual” and that if the premium-adjustment rate on the policy matched the inflation rate, Old Mutual would determine the increases at its discretion.

In January this year, as Heyneke was about to get rid of the policy documents after the policies matured, he realised that they referred to a “guaranteed maturity value” and that the payments he received fell well short of these values. In fact, he received amounts of between 12{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} and 24{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} less than the guaranteed values respectively, totalling about R75 000.

Following several engagements with his broker and in an effort to determine why the payments differed from what was seemingly guaranteed values, Heyneke wrote to Old Mutual to get clarity.

Initial correspondence from Old Mutual included a standard document stating: “As this rate [CPI] cannot be predetermined an illustrative rate is used in the calculation of future values… to provide the client with an illustration of what the GMB [guaranteed maturity amount] would be based on this 12{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} assumption.”

Old Mutual seemed not to differentiate between projected values and guaranteed values, specifically where it determined the annual premium adjustments, Heyneke says.

Shortly after he presented a copy of an original policy document to the insurer his bank advised that Old Mutual had made three payments to his bank account. Closer examination revealed that the payments reflected the difference between the guaranteed maturity values and the amounts previously paid.

Investment spikes after ratings downgrade

High Net Worth South Africans (HNW), in pursuit of alternative citizenship and residency, are forking out millions in job creation and investment initiatives abroad.

New United States Citizenship and Immigration Services (USCIS) data shows wealthy South Africans consistently rank among the top 15 investors by origin in pursuit of EB-5 visas.

South African filings for “immigrant investor” status more than doubled to 40 in 2015, with the applicants spending $20 million on creating around 400 jobs in the US. South Africa’s unemployment rate stood at 24.5{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} in the fourth quarter of 2015.

To qualify for the visa, which enables applicants to obtain US green cards, foreigners must invest $500 000 in businesses or real estate projects that create or preserve at least ten full-time jobs for American workers.

Listen to the podcast: US residency viable through investment

Although no data is available for 2016, it is highly likely that the number of filings doubled again in 2016, said LCR capital. The international private equity investment firm, which facilitates local applications, says political developments drive interest among HNW South Africans.

Following South Africa’s credit rating downgrade to junk status, the firm has seen a spike in interest with new enquiries being made on a daily basis rather than weekly.

“It is an extremely niche market as individuals need a lot of money [to secure the visa]. Some of the enquiries are from people who want to relocate and some are just looking for a ‘plan B’ or to secure better education opportunities for their children,” said Douglas van der Merwe, LCR’s local representative.

He added that the Fees Must Fall protests and Nenegate also triggered significant interest. Additionally, some applicants cite Black Economic Empowerment (BEE) laws and glass ceilings in the corporate world as motivating factors.

LIO Global’s Nadia Read Thaele also reported an increase in interest in citizenship by investment and second residency programmes following the cabinet reshuffle, which ultimately lead to the credit ratings downgrades.

“This industry is based on public perception. Demand is almost never consistent as the industry and markets are always changing. Lately, politics has been driving interest, there was definitely a strong spike in interest after the cabinet reshuffle,” she said.

According to Thaele, the majority of HNW individuals don’t necessarily want to leave South Africa but are seeking freedom – freedom of business travel for entrepreneurs and freedom to study abroad for their children.

She said that more than 80{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} of the applications facilitated by LIO were for programmes in Malta and Antigua, both of which offer strong passports.

The Maltese programme requires an investment of €1 million. Antigua requires a $250 000 donation to the government or a $400 000 investment in real estate projects largely geared toward hotels and hospitality.

Talking about money mistakes to avoid in your 30s

Tonight we get into our personal finance topic, talking about money mistakes to avoid in your 30s. CEO at CrueInvest, Craig Torr, joins us for tonight’s topic. Let’s define what money mistakes are.

CRAIG TORR: Those are your typical mistakes that you tend to make early on in life and just continue making those bad decisions and they obviously compound upon one another through a lifetime.

TUMISANG NDLOVU: What then are some of the most common money mistakes made by those in this particular age group, and I speak for myself at this tender age of 32.

CRAIG TORR: I think the one that jumps out at us is the cost of the wedding and that tends to set most married couples back quite far in their financial planning. There’s a lot of pressure obviously to live up to expectations of it being a great day and family involved and so on but one needs to be quite careful about the costs involved in putting that day together.

TUMISANG NDLOVU: The advice then there would be how do you then say no to pleasing everybody else and pleasing your own pocket to ensure that going forward you don’t actually run into a ditch where money is concerned?

CRAIG TORR: I think it’s about communication and being open and honest and having those discussions in advance and also involving the family, depending on who’s going to be paying for the wedding as well. It differs from scenario to scenario but all too often we see young couples really overdoing it on that wedding, possibly where the parents are not in a financial position to assist to the extent that they would like to. So it’s really about communication and affordability, those would be the two important issues to take into consideration.

TUMISANG NDLOVU: Still on the big expenses in terms of one’s life at this stage of 30 going upwards, things such as cars or your first property, how do you then make sure that you navigate around this and don’t make mistakes in this particular process?

CRAIG TORR: I think again the car and the property are two very different decisions, the property is very much a lifestyle decision, there’s a lot of emotion attached to it, it’s typically the home that you are going to raise kids in and so on. We’d be more comfortable to stretch the budget on that one as opposed to the cars, where those cars are depreciating assets that cost a considerable amount of money. So if we were to compromise on one we would look at advising to rather compromise on the car than on the house because failure to do so could result in you having to move more often than is necessary and that also comes with its built-in costs.

TUMISANG NDLOVU: What’s there to be said then about the small stuff, I know one of my bad habits is coffee, biltong that I don’t really need and when you calculate the cost of this at the end of each month you realise that you’ve spent quite a lot of money. Cigarettes are also an issue, it’s a lot of money if you calculate it over 12 months.

CRAIG TORR: Absolutely, I think you’ve hit the nail on the head, you do need to be cognisant of those little things like the day-to-day expenses, the cool drinks, the sandwiches that could all be reduced by planning a little better, making your own food or whatever it might be, maybe eating more healthy and so on.