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Reviewing your financial plan: 20 circumstances which may necessitate a review

With today being World Financial Planning Day, now is an opportune time to review your financial plan. A financial plan is a living, fluid document that should be sufficiently flexible to change and adapt as your personal and financial circumstances do. While it is always advisable to review your financial plan on at least an annual basis, there are other circumstances that may necessitate a more frequent review of your plan. In this article, we explore 20 life events that may prompt you to review your financial plan:

A change in your earnings: Your income forms the foundation of your financial planning as your goals can only be achieved by appropriately allocating your income. If your income changes in any way, it is always a good idea to revisit your financial plan. An increase in earnings may allow you to achieve some of your financial goals sooner or begin channelling funds towards a goal that you have not yet started funding for. It may mean you can channel a greater amount towards your retirement annuity or afford a more comprehensive medical aid plan. The danger of earning more is allowing lifestyle creep to happen – buying more home, vehicle, or material things than you actually need – without first determining how your extra earnings can be used to fortify your financial future.

Purchasing fixed property: If you’ve purchased fixed property, whether financed or not, it is always a good idea to review your financial plan. Bear in mind that the acquisition of fixed property may mean that you need to update your will. In addition, if you’ve taken out a home loan, you may need to adjust your life cover to ensure that there is no shortfall in the event of your death or disability. Further, there are additional monthly costs associated with owning a property, and it is always advisable to adjust your monthly budget to account for these costs.

Receiving an inheritance: Receiving an inheritance will likely mean that you need to make investment decisions regarding the inherited funds. This is also a good time to revisit your goals, keeping in mind that a sizeable inheritance may provide you with the financial freedom to plan a different path and pursue different lifestyle goals.

Change in employment: Moving from one employer to another may prompt a number of financial planning discussions particularly around your group retirement funding and risk cover. Firstly, you may need to make investment and/or withdrawal decisions in respect of your group retirement fund, and the various tax implications that are applicable. Secondly, you will need to understand to what extent your new group life and disability cover meets your needs, and if any additional solutions need to be put in place.

Retrenchment: Being retrenched will undoubtedly give rise to a number of key decisions that need to be made, and it is nearly always advisable to seek financial planning advice – preferably early on in the retrenchment negotiations. You will need to make critical decisions regarding your retrenchment benefit and severance pay, while ensuring that you fully understand the tax implications of each decision. Further, losing your group risk cover may result in you having to take out cover in your personal capacity to ensure that you remain adequately protected. Depending on the decisions you make regarding your retrenchment package, you may need to make investment decisions and update your retirement plan accordingly.

Setting up a business: Deciding to set up a business will generally mean sourcing start-up capital, withdrawing from one’s investments to finance the business, replacing group risk cover with personal insurance, tightening one’s budget, and preparing business cashflow projections in support of one’s business plan. You may even need to realise an asset in order to help fund your business idea or take out a loan to help fund the start-up, in which case a financial planning review is a must.

Contemplating retirement: Retirement is a massive step to take, and it is always advisable to seek financial advice a number of years before formal retirement. There are a number of critical decisions to get right in the years leading up to retirement, so avoid waiting until after you’ve retired to get professional advice. In the years leading up to your retirement, you will want to ensure that you are adequately funded and appropriately invested for retirement, and that your post-retirement goals are realistic and achievable. If there are any anomalies or retirement funding shortfalls, at least you are giving yourself the benefit of time in which to alter the course and update your retirement plan.

Addition of financial dependants: Any new dependants, such as the birth or adoption of a child, or taking on the financial responsibility of an aged parent, may require that you re-visit your planning. The arrival of a child will mean updating your will and estate plan and reviewing your life cover to ensure that your child is adequately provided for. You’ll also need to review your budget, start funding for education, and building the costs of raising a child into your financial plan. You may also need to amend the beneficiary nominations on your policies and investments.

Contemplating emigration: Before making the decision to emigrate, it is advisable to review your plan to ensure that you fully understand the financial impact of doing so. Regardless of where you intend to relocate to, emigration is an enormously expensive undertaking that requires meticulous planning. Moving your assets abroad is a complex and time-consuming process, and it is advisable to plan your emigration together with an experienced advisor.

Change in financial goals: The financial plan that you have in place should be fully aligned with your stated goals and objectives – and any changes to your goals should necessitate a review. For instance, if one of your goals was to fund an overseas trip five years from now, your investments would be geared toward a five-year investment horizon. If circumstances change and an overseas trip is no longer on the cards, you will need to re-set your goals and gear your investments accordingly.

Marriage: Marriage almost always necessitates a financial planning review as there are significant financial implications for both couples regardless of which matrimonial property regime you choose to implement. Not only will each of you want to update your wills, but it is likely that you will need to develop a joint household budget and update your risk cover to make provision for each other in the event of a tragedy. It is also the perfect time to undertake a shared goalsetting exercise and begin the process of joint financial planning.

Divorce: Similarly, a financial planning review is almost always required in the event of a divorce, although it is preferable to seek the guidance of your financial planner before signing a settlement agreement. Depending on how your assets will be divided on divorce, a number of key decisions will need to be made – many of which have tax and CGT implications.

Severe illness diagnosis or disability: A disability or severe illness diagnosis is likely to have an impact on your income and future earning potential which, in turn, will require a fully updated financial plan. If you have dread disease cover and/or disability cover in place, your advisor should be in a position to guide you through the claims process and ensure that any payouts received are appropriately invested. Depending on the diagnosis, you may also want to ensure that your will is updated and that you sign a living will or advance healthcare directive.

Retirement: Formal retirement from your retirement funds requires critical decisions in respect of your investments, the purchasing of an appropriate living or life annuity, selecting a suitable drawdown rate, possibly downscaling your primary residence and reinvesting the capital, preparing a post-retirement budget, and determining future liquidity throughout your retirement years, and this process is best navigated with the guidance of a retirement planning expert.

Making donations: If you plan to assist your adult children financially, give financial gifts to your grandchildren, or make donations to your charity, ensure that these intentions are provided for in your financial plan so that you do not end up paying donations tax. Ensure that your financial plan is updated to include your intentions to gift or donate money and that it is supported by a tax-efficient timeline.

Purchasing offshore assets: If you intend to purchase assets offshore, speak to your advisor about the financial implications of doing so. Depending on the jurisdiction in which you intend to buy your asset and the nature of the asset, you may need to have a foreign will drafted to deal with those assets. It is also important to understand the tax implications of buying and selling offshore assets, and how it will affect your estate planning.

Disinvesting: Disinvesting from any investment will have tax implications that you should be aware of before transacting to avoid paying unnecessary tax. Depending on whether you are invested in equities, bonds, property, or cash, it is important to understand the tax implications of doing so before disinvesting.

Setting up a trust: If you intend to set up a trust to house certain assets for the benefit of your children or other beneficiaries, be sure to review your financial plan as the transfer of assets into a trust will significantly affect your planning, specifically your estate plan. It is important to be clear on your intentions for setting up a trust, the implications of moving assets into a trust, what it means to lose control of those assets, and how the trust should be structured to best achieve your objectives.

Death of a spouse: Losing a spouse will require a complete reset of your financial plan. Ranked as life’s most traumatic events, the financial implications of losing a spouse cannot be underestimated. Every single component of your financial planning, including income, expenditure, budgeting, money management, risk cover, retirement funding and estate planning, will be impacted by your spouse’s death, and the sooner you review your financial plan, the better.

Market fluctuations: Market fluctuations can leave long-term investors feeling nervous and edgy and may cause them to make knee-jerk decisions regarding their investments. If investment markets are particularly volatile and you need to understand the implications for your long-term investments, schedule time to meet with your advisor before making any rash decisions. Short-term market fluctuations are normal, and sometimes it just takes the reassurance of an experienced investment advisor to re-focus on your long-term goals.

ADVISOR PROFILE

Craig Torr

Crue Invest (Pty) Ltd

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