While there is certainly no one-size-fits-all when it comes to financial planning, there are generally a number of identifiable life stages that require different levels of interventions and prioritisation from a planning perspective. As one moves from one life stage to the next, certain aspects of one’s financial planning may become more focal or intensified, while others may become less important and/or urgent. In this article, we explore the various life stages as they relate to one’s financial journey.
As you set out on your career and before you get married or find a long-term partner, there are a number of key steps you will need to take to set yourself up for financial success. Your first paycheque marks the beginning of the accumulation phase – the period in which your earning capacity will afford you the opportunity to create sufficient wealth to sustain your living costs at a time when you are no longer able to earn, or at a point where you no longer wish to work. While retirement may not be a priority for you, this is a good phase to figure out what financial freedom means to you, and at what point you would like to achieve it. If your goal is to achieve early retirement, now is a good time to have a financial plan drafted so that you can start working to achieve this objective. Regardless of your longer-term retirement plans, it makes financial sense to take advantage of the significant tax benefits of investing towards a registered retirement fund; and while you may not be in a financial position to invest the full tax-deductible amount of 27.5% of your taxable income towards a retirement fund, consider starting with an amount you feel comfortable with and then increase your contributions as and when you are in a financial position to do so.
From a risk perspective, taking out a comprehensive income protection benefit to protect your income in the event that you are temporarily or permanently disabled and unable to generate an income is of the utmost importance. Navigating the disability insurance industry can be a technical minefield, so be sure to seek the advice of an independent advisor who can assist in tailoring an income protection benefit that is appropriate for your needs, income, occupation, and risk profile.
Something that your future self will thank you for is setting up an emergency fund that will cover between three- and six months’ worth of expenses. In the absence of an emergency fund, you may be forced to unnecessarily incur debt which will generally be at a high rate of interest. Set up a specific savings account earmarked for emergency funding and incrementally build up these funds until you reach a level that you are comfortable with. Also important in this stage of life is to join a registered South African medical aid, keeping in mind that there are a range of affordable network options that cater to all income levels.
Once married, you will need to reassess your need for life cover so as to align it with your changed circumstances. If you and your spouse have purchased a home, it is likely that you will need life cover equivalent to the value of your home loan. In addition, you and your spouse may want to make financial provision for each other in the event of death, so be sure to assess your life cover needs carefully. Keep in mind that while you are relatively young and healthy, you should be able to secure life cover at a much more cost-effective rate than if you were to apply later in life.
You and your spouse will need to update your respective Wills to make adequate provision for the distribution of your respective assets in the event of either of your deaths. You will also need to spend time creating a budgeting system for the joint household and figure out how the day-to-day financial management of your affairs will work. From a practical point of view, it generally makes sense for you and your spouse to join the same medical aid, and at the same time re-assess the plan option that is most appropriate for your respective healthcare needs.
Now is also a good time to discuss your joint retirement goals, your respective visions for retirement, and to develop a baseline joint retirement plan. Remember, a retirement plan is not cast in stone but is rather a fluid, pliable map that is designed to adapt as your circumstances change over time. That said, maximising the tax-efficiency of your respective retirement investments should be a priority and, with a longer-term investment horizon, you can seek to invest in growth assets that promise a greater return of your investment over time.
Your investment strategy will need to find a workable balance between funding for your retirement while at the same time building a discretionary portfolio that will allow you access to your capital to fund expenses such as a deposit on a house, overseas travel, home renovations, or vehicle purchases.
The arrival of a child necessitates a number of financial planning interventions, not least of which is to update your Will to ensure that your child is adequately provided for in the event of your death, and in the event of simultaneous death – making the appointment of a legal guardian for your minor child an imperative. Many parents of minor children make provision for a testamentary trust in their Wills, with the purpose being to ensure that assets intended for their minor children are protected in a trust structure and managed by nominated trustees until the children are old enough to manage their own affairs. While you are still building your wealth, ensuring that you have sufficient life cover to provide for your child should something happen to you is essential, and it is likely that you will need to increase your life cover accordingly. This is also a good time to set up an education fund for your child using a discretionary investment vehicle such as a collective investment scheme or by using a tax-free savings account. Often referred to as the ‘lean years’, it’s during this period that many couples struggle to find a balance between making home loan repayments, saving for retirement, paying day care fees, while at the same time setting money aside for their children’s tertiary education. The term ‘this too shall pass’ is very apt for this life stage. As frenetic and financially taxing as this period can be, there will soon come a time when the bond and cars will be paid off, the children will be educated, and your monthly living expenses will reduce dramatically – allowing you to move your focus towards your retirement funding. The value of an experienced retirement planning expert in this period of life cannot be understated as he should be able to develop a strategy within the framework of your affordability to ensure that you can still reach your longer-term retirement goals.
With financially dependent adult children, this life stage is critical when it comes to fine-tuning your retirement plan, settling debt, and structuring your assets. Having increased your net worth, reduced your home loan debt, and with fewer financial dependants, it is likely that you will be in a position to trim back on your life cover somewhat. Any savings achieved from reducing your life cover can be put to good use in bolstering your retirement funding. Similarly, as and when your home and vehicles are paid off, the additional cashflow can be channelled towards your retirement savings, ensuring that you are strategic about maximising tax-efficiency while at the same time keeping sufficient capital in your discretionary portfolio to ensure liquidity later on in retirement. You will no doubt also want access to discretionary funds to finance your travel goals, pay for weddings, and to fund larger purchases.
Having accumulated a number of assets, estate planning and tax structuring will be a priority for you to ensure that the structure of your estate is tax-efficient and fully aligned with your wealth transference goals. With a more complex estate and the absence of minor children, updating your Will to align it with your estate planning goals will likely be necessary. As you age, funding the costs of your current and future healthcare needs will be top-of-mind. Moving onto a more comprehensive medical aid option is something worth contemplating, especially if you or your spouse have chronic conditions. As it is expected that your healthcare costs will escalate as you age and that the likelihood of a hospitalisation increases as you get older, a gap cover policy becomes more and more important. If you’re still living in the family home, you may consider downscaling to a more manageable-sized property with lock-up-and-go benefits that will allow you more freedom to travel. Ideally, seek guidance from your retirement planner in terms of how best to re-invest any proceeds from the sale of this property so that it aligns with your retirement planning.
Formal retirement from your retirement funds will require some critical decisions to be made, including the timing of your retirement, purchasing an annuity income, choosing an investment strategy, balancing income streams, and setting draw down levels. Formal retirement marks the end of the accumulation phase of your life, and the beginning of the point at which you start drawing down from your accumulated wealth and is critical that you get these decisions right. Retirement funding is a highly complex, strictly regulated area of financial planning, and it is always advisable that you seek the counsel of an experienced retirement advisor when making these decisions.
One of the biggest cost items you will need to prepare for later on in your retirement is the cost of care, whether in the form of frail care, assisted living, or private home nursing, and advance planning should be done in this regard. Many retirement facilities have waiting periods of ten years or more, so now’s the time to do your research, submit your applications, and prepare more detailed retirement cashflow analyses to ensure that your healthcare plan for old age is affordable.
A big priority as you reach old age is to ensure that your estate is appropriately structured and that you have plans in place should you become physically or mentally incapacitated and unable to manage your affairs. If you are fortunate enough to have adult children to assist you, you may want to consider providing them with a general power of attorney, especially if physical mobility is a problem for you. Very often, older people lose touch with technology and can feel particularly isolated and/or vulnerable when it comes to managing their financial affairs. The risk of dementia or mental incapacity becomes higher as one ages, and if this is of concern to you, there are steps you can take while you still have the mental capacity to ensure that your assets can be managed on your behalf if your mental acuity deteriorates.