Children’s author Brandon Mull tells us “Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.” These are wise words indeed.
Clients come to us at various stages of life. Some are just starting out and in need of life cover as they get married and purchase their first home. Some find themselves alone due to death or divorce and need assistance with taking charge of their financial future for the first time. Others seek help upon retirement as they suddenly find themselves in a stage of life they knew was coming but never really imagined would arrive.
Whatever stage of life or financial position you find yourself in there are three common financial mistakes many people make which can threaten the security of your financial future. These are: inadequate healthcare planning, ineffective risk management and emotional corrosion, and insufficient retirement planning.
1. Inadequate healthcare planning
In life we are told to “expect the unexpected”. And in financial planning, the biggest challenge is always making provision for the unforeseen events that befall us. It is hard when in the prime of our life to imagine a time when our health will fail us. Equally impossible to imagine is the significant financial burden this can become.
The cost of private healthcare in South Africa has steadily increased in the recent past. Statistics South Africa tells us that healthcare inflation has exceeded CPI inflation by 4.3% annually between 2009 and 2013. As a result, where health insurance used to comprise 3.4% of household expenditure in 2006 / 2007, it made up about 7.2% in 2010 / 2011. And the trend has not abated. Making provision for a 10% annual increase in your medical cover is the industry norm.
South Africa’s targeted inflation rate is between 3 and 6%. With medical costs increasing persistently at around 10%, a significant portion of your retirement capital needs to be earmarked for health insurance. But it doesn’t end there. Ill-health is associated with a number of other costs: the bills medial aids won’t cover for specialist procedures and drugs, nursing care at home or in a long-term treatment facility, etc.
In financial planning the three primary variables to take into consideration are: inflation, return on investment and the rate of withdrawal. If you have not set aside a significant portion of your retirement capital for medical expenses you will have to fund these expenses from capital reserved for other purposes, such as general living expenses.
Inadequate healthcare planning is one of the reasons many retirees are facing a significant reduction in their standard of living.
2. Ineffective risk management and emotional corrosion
As stated, in financial planning, it is imperative to plan for the “expected unexpected’s”. Market movements are another example. Equity markets rise, correct, fall, correct, rise again and so on. Experiencing fear when you face capital losses is to be expected. A sound investment strategy and holistic plan will address the emotional side of investing so as to ensure that you stick to your plan – and so avoid costly mistakes – when trying times arise.
As part of the planning process, you need to ask yourself:
What is my purpose or end goal for my investments?
Perhaps the investment in question forms part of the core wealth you require to provide for your income needs in retirement. Or perhaps it comprises the surplus wealth you wish to leave as a legacy. These two examples would have very different investment strategies attached and you as an investor would have a very different attitude to risk with each.
What is the anticipated time horizon for your respective investments?
Capital with an imminent maturity date requires an investment and risk strategy very different from capital required to be withdrawn in a number of decades hence. You should invest the latter in high risk, high return funds so as to generate the investment returns you need with minimal downside risk in the long-term. The former you should invest in low risk, moderate return investments so as to ensure the capital is there when you need it. Such a strategy will help to alleviate your concerns in times of market turmoil as you will know that the requisite capital is available when you need it.
How do my other, non-monetary assets form part of my financial goals and plan?
Perhaps the upkeep of your dear holiday home is becoming a little too dear and you need to consider renting it out when you’re not using it to cover expenses. Or maybe the fishing boat you take out a couple times a year should be sacrificed now so that you and your spouse can travel in later years.
How am I going to stick to my plan when times are tough or temptation calls?
Your financial advisor will be able to provide the perspective you need when you begin to lose yours and will have the strategic patience required to help you realise your goals. Your advisor will review your plan on an annual basis – or when needed – in order to make sure that your current circumstances and future goals remain in line.
3. Insufficient retirement planning
In an ideal world, a retirement plan would be created for each person many years before their retirement starts. In reality, this is seldom the case. Perhaps this is because it can be challenging to imagine ourselves in the future and for that reason we prioritise the now. However, the fact remains that the decisions you make today are the same ones that determine your future.
Many retirees today are facing a significantly reduced standard of living as the stage of life they find themselves in always seemed light years and lifetimes away when they were young. It is never too late to engage an advisor to help you to make important financial decisions, whether your retirement is 30 days or 30 years away.
Have you adequately planned for your retirement? Does this plan sufficiently provide for your healthcare as well as life’s expected “unexpected’s”? As experts in retirement-readiness, we understand that planning and preparing for retirement is an exciting prospect and a daunting one as well. The Wealth Corporation’s advisory solution offers a complete view of the retirement planning and management process, looking at all aspects of financial and personal well-being. We call this process Integrated Insight.
Johan Lotz is Advice Partner at The Wealth Corporation