If you’re one of the lucky ones, here’s a snapshot of your life…
You spend 18 years of it going to school. Maybe you’re fortunate enough to spend another 3 to 5 years attending University – which is what, 23 years in total – and then you start your career.
You then work from age 23 right up until 65. That’s 42 years, all in all. Then you spend the next 20 years in retirement.
If you’re one of the unlucky ones, you don’t find a job until you’re 30 and get sent off on early retirement at 55. Your working career is only 25 years, with 30 years spent in retirement.
For most us, those 25 to 42 working years are spent as an employee.
- Trains us
- Promotes us,
- Gives us increases every year (and if they don’t, those who can resign, and the rest of us go on strike)
- Allows us to take paid holidays every year
- Provides us with medical aid, and
- Forces us to save for retirement
But your employer knows something you don’t.
Let’s go back to a time long, long ago.
In those days your employer looked after you from cradle to grave. As an employee, you belonged to what’s known as a defined benefit fund.
With a defined benefit fund, the employer took on all the risk of being able to provide you with an income from the day you stopped working till the day you died.
It worked something like this:
- Years of service multiplied by
- Final salary multiplied by
- A factor
Someone earning R10,000 a month would have the following sort of calculation:
- R10,000 x 42 years’ service x 2% = R8,400 a month
- R10,000 x 20 years’ service x 2% = R4,000 a month
But then one day, everything changed.
Employers were struggling to live up to their promises. The solution was to move to defined contribution funds. In other words, the employer contributed X amount to a fund as did the employee. At retirement, the employee took whatever was in the pot and was told to sort out their own retirement. Investment risk was transferred from employer to employee.
You were now on your own.
Who then is responsible for you during the last 20 to 30 years of your life?
Let’s think about it for a moment:
- No-one there to manage your retirement path
- No-one there to manage what you want as an income versus what you can afford to take as an income
- No-one there to tell you how best to invest the money you have available
Think about this for a moment…
- If your employer, with all the actuaries, accountants, and analysts at their disposal, couldn’t make a defined benefit fund work for their employees,
- how on earth will you make it work?
This is where your financial advisor makes the difference
In a previous article, we wrote about the benefit of a financial plan. The number one purpose of that plan is to help you identify the shortfall between what you have and what you need at retirement.
Let’s say you have a shortfall of R500 000, and 10 years left to accumulate it.
Since time isn’t an option, you’re basically left with two:
- You could invest more of your income every month
- You could earn a higher return every year
But this creates two problems:
- what if you don’t have the disposable income needed to invest?
- Or you do have the extra income, but don’t earn the required return?
Problem 1 – Not enough disposable income to invest
Paul has R2,200 a month available to invest. If Paul earned a 5% return every year it would mean he needs to invest R3, 207 a month. If he could increase the return from 5% to 12% every year he would achieve his goal.
Problem 2 – Enough money but poor returns
James has R3,000 a month to invest. Earning a 5% return every year would mean he misses his goal. Increase his return to 8% per annum and he easily achieves his goal.
Meeting with your financial advisor to review your financial plan every year allows you the opportunity to review actual investment performance versus required performance. At this stage, you have the option of:
- Investing in better performing funds, or
- Investing even more money to address the shortfall
So that’s the first benefit offered by your financial advisor. Now for the second benefit.
Let’s again refer to the previous article about financial planning.
One of the things mentioned in that article was the need to project your income need till retirement. But what if your projected income need has changed?
Think about it. Asking someone to project their monthly income requirement twenty years into the future is ridiculous. In the article mentioned above, we talked about R174,000 a month being the equivalent of R10,000 a month today. Can you even get your head around a figure so high?
The problem with changing your income need is that it changes everything in your previous financial plan.
You’re going to spend many years in retirement. Leaving retirement planning until the day you retire is lethal. I read somewhere that an aircraft is continually flying off-course and that corrections need to be made continuously by the pilot.
Think of your financial advisor as your pilot. Meeting with them every year does two important things for you:
- They recalculate your retirement shortfall to see if you’re still on track, and
- They analyse your investment returns to see if you’re getting value for money. How many of us end up shocked when we discover how poorly our investments have done after ten years?
And there’s another reason to meet with your financial advisor every year – How can you trust someone with your retirement money if you don’t build up a relationship of trust with them?
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