Just as our personal circumstances fluctuate over time, so too should our financial plans be sufficiently malleable to adapt to these changes as and when they happen. To ensure that your financial plan is robust enough to confront such changes, consider using scenario planning techniques as a way of visualising potential eventualities that may arise, and then putting mechanisms in place to mitigate against them. In doing so, asking the question ‘what if’ can be a powerful precursor to finding workable solutions.
Consider the following:
What if I injure myself and can’t work for a couple of months?
While it’s important to protect oneself against the risk of a permanent disability, the reality is that the chances of suffering from a temporary disablement as a result of injury, illness or accident are far more likely to occur. This could take the form of a broken limb, elective surgery that renders you unable to work for a period of time, or a prolonged illness that affects your ability to work. In circumstances such as this, an income protection benefit that includes cover for a temporary disability is an effective mechanism that can be considered. Income protection is a form of disability cover that acts as a salary protection plan which can provide between 75% and 100% of your nominated income in the event that you become disabled. However, when taking out this form of cover, be sure that your policy includes cover for temporary disability and read the fine print, specifically when it comes to waiting periods. Typically, income protectors provide cover for temporary disablement for a period of up to two years in aggregate, but it’s the waiting periods that often trip people up. If your policy comes with a two- or three-month waiting period before you can claim, you will need to ensure that you have sufficient emergency reserves to cover your living expenses for the duration of the waiting period. This type of cover is particularly important for those who are self-employed as not being able to work often translates directly into a loss of earnings. If you are formally employed, check whether your group life cover includes an income protection benefit, and educate yourself on exactly how, when and what it covers.
Key considerations: Income protection, medical aid, gap cover.
What if I have an accident and am left in a permanent vegetative state?
If you are left in a vegetative medical condition from which there is no hope of recovery, the onus will fall on your loved ones to make difficult decisions regarding your medical care – including whether to remove you from artificial life support. To alleviate the burden from your loved ones and to give yourself a voice in the event of tragedy, consider drafting a living will. Through a living will, you are able to document how you wish to be cared for medically if you are being artificially kept alive and where there is no hope of recovery. To avoid a situation of conflict amongst your loved ones, you can also consider appointing a medical proxy in your living will – which is someone you trust to liaise with your medical doctors on your behalf if you are unable to. By expressing your wishes through your living will, you are able to save your loved ones enormous amounts of heartache and guilt, while also ensuring that your medical care will be aligned with your wishes. Most importantly, you must ensure that your loved ones and medical practitioner are aware of the existence of your living will and that the document is readily accessible in the event of a tragedy.
Key considerations: Living will, medical proxy, medical aid.
What if I died today?
Preparing for sudden death is an important part of estate planning and, ideally, your financial advisor should prepare scenarios to demonstrate what your estate will look like should you die today. If you are married, your advisor should prepare ‘first-dying spouse’ and ‘second-dying spouse’ scenarios. In preparing for the ‘what if?’ scenario of sudden death, you should give consideration to the validity and location of your last will and testament to ensure that those assets that fall into your estate are adequately dealt with in your will and that your loved ones are aware of its existence and location.
You will also want to check the beneficiary nominations on your various policies to ensure that they are correctly nominated, keeping in mind that the proceeds of such policies will fall outside of your deceased estates and the respective insurers will pay the proceeds directly to your nominated beneficiaries. Your financial advisor should prepare updated liquidity calculations on at least an annual basis to ensure that there would be sufficient liquidity in your estate to settle your debt and estate costs and that, where liquidity is being provided by long-term insurance products, these policies are correctly structured to achieve their purpose.
Keeping in mind that your assets are likely to be frozen in the event of your death, your estate plan should include mechanisms for ensuring that your loved ones have access to cash while your estate is being wound up – a process that can take a couple of years, depending on the complexity of your estate. To alleviate the administrative burden your loved ones are likely to face should you pass on, consider collating an estate planning file that includes copies of all the documents your executor is likely to require in order to effectively wind up your estate. This file would need to include copies of your ID and passport, marriage certificate, divorce certificates, divorce orders, maintenance agreements, your birth certificate, title deeds in respect of immovable property, firearm licences, an inventory of your investments and bank accounts, vehicle registration papers, and so on.
Another useful consideration for your loved ones is to create a ‘digital will’ in which you record a list of all your electronic devices, usernames and passwords, online accounts and subscriptions, and social media accounts, together with instructions as to how you would like these dealt with following your death. You can also name a ‘digital executor’, being someone you completely trust to shut down your online life when you are no longer around.
Key considerations: Estate planning file, last will and testament, digital will.
What if I lose my job?
If you’re formally employed, keep in mind that you’re only ever 30 days away from not having a job. If you’re self-employed or run your own business, you likely face your own set of risks in terms of potential loss of income or business revenue. To mitigate these risks, it is important to assess the likelihood of such an event occurring and the financial impact it would have on you. If you and your spouse or partner both earn an income, then naturally the impact of one of you losing an income would be a lesser blow than if you are the sole breadwinner.
You would also need to give consideration to factors such as how risky your industry is, whether you have other sources of income you can fall back on, and the likelihood of finding another job. While retrenchment cover is an option, it is relatively expensive and has limits in terms of how much it pays out and for how long. Adjusting your emergency fund levels to adequately mitigate against the risk of job loss or loss of income is therefore critical, taking into account factors such as your debt levels, monthly living costs, how effectively you can cut costs from your budget, and how confident you are that you will be able to find alternative employment. Remember, an income protection benefit does not provide cover in the event of retrenchment – it only provides cover for loss of earnings as a result of disability.
Key considerations: Emergency funding, retrenchment cover.
What if I am permanently disabled in an accident or as a result of a severe illness?
When it comes to protecting yourself against a permanent disability, there are a number of solutions you can effectively employ. In addition to the income protection benefit discussed in the first paragraph, you can consider taking out a capital disability benefit which is designed to pay out a tax-free lump sum in the event that you become disabled. This lump sum payment can be used to settle debt, cover the costs of home and vehicle adaptation, supplement your medical costs, pay for medical appliances and costs not covered by your medical aid, or to invest in your retirement. Disability insurance is fairly technical and it’s always best to obtain advice from an independent advisor to ensure that you put comprehensive disability cover in place through a reputable insurer. You may also want to consider putting dread disease cover in place which, like capital disability cover, is designed to pay out a lump sum in the event that you are diagnosed with severe illness. Once again, these funds can be used for multiple purposes and can provide a much-needed financial buffer during times of ill-health.
Key considerations: Capital disability benefit, income protection benefit, dread disease cover, medical aid.
What if my parents run out of money?
Having insight into your parent’s financial affairs – especially if there is a chance that they will run out of retirement savings – is key to the success of your own financial planning. Naturally, your own retirement planning should always take priority, but if there is a chance that you will need to provide financial assistance to your parents at some stage, it helps to be able to prepare ahead for this eventuality. Although opening channels of communication between yourself and your parents early on is critical, it is often difficult to approach the topic of money with older generations. Remember, retirement planning is a relatively new area of expertise and, if you have aged parents, it’s possible that they’ve never had a retirement plan developed for themselves. The first prize would be to have them consult with an independent retirement advisor who can map out a retirement plan for them and alert them to potential cashflow problems on the horizon. Early intervention will allow them to make adjustments to their expenditure, recalibrate their investments, or restructure their portfolios where necessary with a view to increasing the longevity of their capital.
Key considerations: Retirement planning, multi-generational financial planning.
What if I live beyond age 100?
A robust retirement plan should include a set of stress-tested assumptions, including how long you are expected to live. Most retirees’ biggest fear is outliving their retirement capital, and mitigating against this risk requires careful planning – bearing in mind that many illnesses and diseases are a function of aging, and healthcare costs – such as hospital costs, frail care and home nursing – tend to escalate exponentially in the years preceding one’s death. Your retirement plan should therefore include robust assumptions regarding medical inflation, the costs of assisted living facilities and frail care later on in retirement, and scenarios for what your finances would look like should you live beyond age 100. Your advisor should prepare detailed modelling to demonstrate how different draw down levels will affect your cashflow position, and ensure that you have sufficient discretionary funds in place to address any potential liquidity problems as you age.
Key considerations: Retirement planning, long-term healthcare plan, discretionary investments.