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SA's No 1 Insurance Blog

Ever wondered how you would live if you lost your job? How would you pay the rent, the food, school fees?

Scary, right?

But guess what’s even scarier?

I’m about to take you into the life of a pensioner. Someone without the possibility of ever finding another job. Someone who depends on whatever he has saved up in order to live for the rest of their life. So sit back a moment and imagine yourself as retired…

  • You’re 75 years old
  • You expect to make it to 80, and God help you if you ever make it to 85
  • You’ve invested R500, 000 in a conservative fund which is one step above cash in terms of risk
  • The fund has performed extremely well over the past 3 years even though you’ve been withdrawing more than you should of 

Unfortunately, the investment isn’t doing too well right now…

  • In January the investment was worth R497,820
  • In February it was R500,950
  • In March – R502,900
  • In April – R499,823
  • In May – R501,500
  • In June – R496,000
  • In July – R491,000
  • In August – R491,300
  • And as of yesterday – R481,292

You climb on the phone and call your advisor. He then sends you a mail similar to the one I’ve just sent a client.

Let’s look at what you might have received…

What’s happening in the world around us.

  • China is in crisis. They also happen to be a massive purchaser of things like steel and coal; things which we in South Africa have in abundance. This also means we’re not selling as much steel and coal as we used to.
  • On top of that, South Africa is technically in recession, so the question is, “If you were an overseas investor,  would you invest your money here?”

Things aren’t looking good locally or globally for investors in shares, and that’s why your investment is bobbing up and down.

So how does your cash flow look between now and 80?

  • Income needed every month is R4,000 a month right now – R48,000 for the year
  • R5,000 a month needed from next year – year 2 – so that’s R60,000 for the year
  • R6,000 a month in year 3 – R72,000 for the year
  • R7,000 a month in year 4 – R84,000
  • R8,000 a month in year 5 – R96,000
  • That’s R360, 000 you’ll need between now and 80. At the very least it seems as if you have enough capital but what if you live till 85? Or what if you need way more than this going forward because of rampant inflation?

Here’s the problem.

Right now you’re taking R4,000 a month from the investment as an income. That’s 9,973% per annum of your investment being taken as income:

  • R481,292 x 9,973% = R47,999 per annum or R4,000 a month

That means if we want the R481,292 to remain as R481,292 at the end of the year, we need a 9,973% per annum return on your investment.

But what about inflation?
If I take a look at the statistics for July 2015, I see that CPI (Consumer Price Inflation) is 5%.

What that means is we need the R481, 292 to grow by at least 5% to make sure it can still buy you what R481, 292 would have bought you at the beginning of the year.

If I’ve lost you, here’s an example that’s close to my heart.
A 75 (maybe it’ll be 50 gram by the time you read this?) gram slab of Cadbury chocolate cost me around 10 bucks in January of 2015. Right now it’s a cent shy of 13 bucks I think. Clearly, my 10 bucks won’t buy me a Cadbury slab in January of 2016. Still with me on this? Cool!

So should we move to cash?

  • Remember that you’re taking R4,000 a month as an income
  • As I write this the Allan Gray Moneymarket fund is offering an interest rate of 6,61% per annum effective. On an investment of R481,292 this amounts to R31,813 interest for the year, or R2,651 a month
  • To take R4,000 a month, your investment would need to earn 9,97% instead of the 6, 61% Allan Gray is offering.
  • Inflation is hovering at 5% which means you’re actually not earning 6,61% either. It’s closer to 1,61%. R645 a month is what you should be taking instead of the R4,000 a month you’re actually taking.
  • Cash is stable but the current returns aren’t high enough to sustain your current income levels never mind cover inflation.

Or should you just stay where you are?

  • When it comes to money, most of us speak in terms of loss: “My investment lost money!” Truth is, your investment only loses money once you decide to cash it in (Unless the company you invest in goes bankrupt!).
  • At the beginning of August, your investment was worth R491,300. As of yesterday, it is worth R481,292.
  • If you decide to switch out of this fund then we effectively “write off” R10,008 of your investment. That’s 2 month’s worth of your income down the drain, and you ain’t going to make it back by investing in cash

To end off.

Save while you still can. Times are tough right now, but they’re even tougher at retirement.

  • For pensioners, there’s no “find another job” option available, and
  • with most companies, there’s also no “continue working after retirement age” option for employees.

Importantly, remember why you’re investing.

In this example, he was investing so that his capital could outperform inflation and provide a sustainable income until the day he passes away.

  • Over the past 3 years, this investment had returned 11% a year versus cash at 5,77% a year.
  • Now that he was experiencing a minus 1,79% return over the past month, he wanted to jump into the next best thing

And remember, a paper loss only becomes an actual loss once you cash in your investment.

  • By all means, re-balance your investments every year, but don’t bounce all over the place between fear and greed.
  • By re-balance I mean that if you’ve decided to expose your investment to 20% shares – and now this figure is nudging the 30% mark – then reduce your share exposure back down to 20%.

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