Elke Brink, Wealth Adviser at R21 Wealth Management Stellenbosch Technopark.
I am changing jobs and am faced with the decision regarding my retirement fund. I have the choice to either transfer it into my name or opt for a cash payout to alleviate some of my existing debt. Due to the uncertain nature of finding another job in the immediate future, and considering the long-term implications, I’m uncertain which route would serve me best. Can you advise?
When we change employment, the temptation is always there to access our retirement funds, as the documentation is often provided as a matter of course and future opportunities are still unclear. The power of preservation proves otherwise and just benefiting from time, and compound interest, can have a life-changing effect. The average person will change jobs around 12 times in their lifetime (according to a 2019 Bureau of Labor Statistics (BLS) survey of baby boomers in the USA) – even more reason to reinvest your retirement funds every time you make a life change.
A preservation fund is an investment vehicle where you can reinvest your retirement funds without incurring any tax implication at the reinvestment stage. The fund provides the flexibility of enabling you one withdrawal prior to retirement of the full benefit, subject to income tax at the lump sum withdrawal tax tables.
If a partial withdrawal is made, the balance of the benefits remains in the fund until retirement age (55). No ongoing contributions may be made to the preservation fund.
The below example as provided in the Sanlam Benchmark Survey illustrates how reinvesting your funds when changing occupations, could lead to a 3x larger investment value at retirement, compared to making withdrawals on these employer changes – every time you are essentially starting over, but with a shorter investment term to retirement. (The assumptions of the calculation are as follows: 9% p.a. interest earned on retirement savings; starting salary of R5 000 p.m; salary increases by 7.5% p.a. on average over career; contributes 8% of gross salary to retirement savings.)
Scenario 1: Thembi preserved her savings and retired comfortably. Her total capital contribution over 30 years amounted to R496 317. She earned R1 017 226 interest in her retirement fund. R0 withdrawals over 30 years and R1 513 543 in total retirement savings after 30 years which is almost 3x the investment value, simply by preserving.
Scenario 2: Thembi cashed in her savings at age 32 and 43 and retired short on cash. Her total capital contribution over 30 years amounted to R496 317. She earned R203 484 interest in her retirement fund. R261 972 withdrawals over 30 years and R527 079 in total retirement savings after 30 years.
Regarding your existing debt, I suggest creating a contingency plan to manage it without jeopardising your retirement savings. There are various options to consider such as refinancing or restructuring your debt, negotiating with creditors, or implementing a strict budget to manage expenses.
Leaving an employer is sometimes a much bigger life event than we give it credit for – your portfolio will require holistic restructuring, and this is best done sooner rather than later.
Jacqui Kruger, Wealth Manager, Silver Lakes Wealth Management & Stockbroking.
For the past 18 years, I have been a stay-at-home mom. Following my recent divorce, I find myself in unfamiliar territory regarding investments. I want to use some of my settlement funds for income-generating investments. I’m seeking guidance on how to begin this journey. Where should I start to explore my options and make informed decisions?
I’m sure the world of investments may seem daunting, but the good news is, you’re not alone. To provide a comprehensive answer, additional factors need to be taken into account, such as:
- Your current age
- Have you since re-entered the workforce?
- Do you have an emergency fund and long-term insurance contracts in place?
- Do you have minor children for which there might be expenses of a capital nature in the future?
The above factors are by no means exhaustive but are important to take into account during the financial planning process. I would err on the side of caution if you are 100% dependent upon the proceeds of your settlement to cover day to day expenses and recommend you seek professional advice which is beyond the scope of the limited response we are able to provide here.
A financial adviser can provide personalised guidance based on your financial goals and circumstances and help you develop an investment plan tailored to your risk tolerance and objectives.
As part of the advice process, your current financial situation will be evaluated and areas of risk identified. Holistic financial planning will enable you to understand your financial picture in terms of the present as well as the future.
It is only once we have a clear understanding of your needs vs current provision, that a solution can be formulated with regard to suitable investment products and an asset allocation, which will ultimately determine returns and overall financial well-being.
Graham Lovely, Wealth Manager, PSG Wealth, Claremont, Cape Town.
My cash inflow has increased, and I would like to expand my investment portfolio. I’m interested in investing in a unit trust fund, but I’m worried about the risks associated with such an investment. How do I navigate this decision?
There are precautions you can take to safeguard your portfolio however, it is the nature of the game in business and investment to be exposed to various risks. Hence, risk management is critical to success.
Risk management is the process of managing risk, not necessarily avoiding it altogether. Diversification is one way to mitigate risk and understanding risk is key. Investment risk can be broadly split into two categories, namely systematic (market) risk or unsystematic (idiosyncratic) risk. Systematic risk is tied to the broader market and is not based on individual investments. It is unavoidable and cannot be reduced through diversification – examples being inflation, interest rates, and recessions.
Non-systematic risks, on the other hand, are specific to an industry, a sector or company and is tied to individual investments. This type of risk is avoidable and can be reduced by the correct use of diversification. Various studies have found that multi-manager strategies can help to reduce the impact of market volatility on investment portfolios and improve risk-adjusted returns. By being diversified across management companies, investment styles, asset classes and countries, multi-managers aim to reduce the risk of idiosyncratic risk within the portfolio. Even within the multi-manager framework there are various ‘baskets' of funds with different strategies and risk profiles. I would encourage you to seek a financial adviser who can help you navigate this in line with your needs and objectives.
Jaanre Muller - Wealth Manager, PSG Wealth, Hermanus.
I find that my financial journey gets sidetracked by big events and situations that need immediate attention and this affects my long-term savings. How can I balance my immediate financial needs with my long-term goals?
Navigating financial challenges and unexpected events can easily derail your long-term savings goals. A clearly defined financial plan is an invaluable tool to help you strike a balance between immediate needs and long-term goals. This plan should not only focus on long-term objectives but also provide for short-term needs and emergencies.
Incorporating short-term needs into your financial plan ensures that you are prepared for the unexpected and helps you remain motivated and committed to your goals. This can include an emergency fund. In planning for the unexpected, it is important to ensure sufficient liquidity in your investment portfolio. This will limit the risk of having to sell long-term assets, which could be adversely affected by a market downturn.
Furthermore, having clear long-term goals provides a framework for evaluating the necessity of short-term expenses and understanding the trade-offs involved. Practising financial mindfulness can help you make better-informed decisions, rather than being driven by emotions. You can potentially adjust your financial plan to accommodate a specific short-term need without sacrificing your financial objectives by committing to a higher savings rate in future to offset the current expense.
Consider your financial adviser as your financial coach. They can not only advise you on the best investments to reach your different goals but also help you determine whether a short-term expense is a want or a need, if it is affordable without derailing your long-term financial stability, and how your financial plan needs to be adjusted to accommodate it.
Karen Rimmer, Head: Distribution at PSG Insure.
As a business owner, I am worried about the impact that strikes and civil unrest could have on my operations. Please could you explain what type of insurance I can get for these risks?
The risks you mention above are not covered by commercial insurers, but rather, are covered via the South African Special Risk Insurance Association (Sasria). It’s important to note that the cover offered by Sasria is not automatically included in your policy, but rather, it needs to be specifically added. Sasria currently provides cover for specialist risks that fall within the following categories: politically motivated malicious acts, riots, civil commotion, public disorder, strikes and acts of terrorism. Sasria also offers an extension for security costs incurred to prevent imminent danger should there be any riots, civil commotion or public disorder within a 10km radius which puts your property in danger. Exclusions from this cover include any material or financial losses caused or contributed to by acts of terrorism that are nuclear, chemical or biological. Sasria only covers assets up to a limit of R500 million, excluding any consequential or indirect loss or damage.
Without this cover, businesses are at risk of sustaining severe financial losses and having to replace or repair their property and goods out of pocket. Having this kind of pre-emptive safeguard in place can therefore provides a much-needed buffer when the unexpected occurs. Sasria provides cover for businesses in several key categories and can be tailored to reflect each client’s needs. We suggest you speak to a financial adviser who will be able to advise you.
PERSONAL FINANCE