How to stop coming off second-best
In many ways I consider myself lucky enough to come from a family where the girls were encouraged to have careers and have financial independence. Not just my generation, but generations before me. All my aunts and uncles on my father’s side were well qualified and had good careers. My paternal grandmother was a feminist before the word was invented. It was ‘normal’ for me to have a career all my life. Not every woman is as lucky, and shaking off those ‘family’ values that are so deeply instilled can be extremely difficult. We’re also living in a very different era. When I was at school in the 70’s only one kid in the entire school came from a ‘broken’ home. Today as many as half the kids have divorced parents. It is the new normal.
Even if a woman has a career, I keep coming across women who abdicate the financial responsibility in a relationship to the man. “I am hopeless with finance, I just let him do that,” and when they divorce they wonder why they get a Snot-Klap.
Nobody goes into a marriage thinking about divorce. We all think we’re going to beat the odds – I know. I am one of them. Unlike many other women though, I was intimately involved in the finances. That advantage, and the fact that the divorce wasn’t acrimonious- we sat down like grown-ups, wrote down all the assets and liabilities and split them up over the dining room table, saving tens of thousands in divorce lawyer fees – made sure I got back on my feet quickly. How you marry really does matter, I have blogged about the various marriage contracts HERE, so I won’t repeat myself.
Investing can be daunting for the average person, not helped by gurus using insider jargon like asset allocation or asset liability modelling, beta, TER, standard deviation, efficiency frontiers and dozens more. Of course you can learn all of these by watching business news every day and googling the terms – but unless this is your job or passion – it’s like watching paint dry. So, what do you need to know so you aren’t ripped off, and what can you leave to the investment nerds that advise you and structure those products?
Asset classes: Basically (and yes, you can get way more complicated if you want to) there are four. Stocks, Bonds, Cash and property. Stocks are found on the local and international stock exchanges. Bonds are similar to cash, and the return is similar. They are issued by government and corporates (they issue them to raise funds, just like you get a mortgage bond to raise funds for your house – it’s long term debt). Property can take various forms, but it is usually commercial rental property. Cash needs no explanation. off shore investments comes with one other big variable. The asset classes will be the same but you have to factor in exchange rate fluctuation. It adds a whole new layer of risk. If the offshore market drops and the exchange rate improves, you’ll have a double whammy.
Return on Investment: Bucks back! This can take various forms. Interest from cash, yield from bonds, capital growth and rental income from property, capital growth and dividends from stock.
Risk: Each of those asset classes behave differently. When you bake a cake the baking powder behaves differently to the egg, but work together to come up with the final yummy product. Cash and bonds don’t give a great return, usually around inflation rate – but they don’t bounce up and down. If you’ve got a delicate investment stomach – that is the way to go, but it isn’t going to grow much beyond inflation. Property is in the ‘new normal’. It used to give a fairly even return, without the ‘volatility’ you get from the stock market. The 2008 credit crunch and recession was caused by property shenanigans in the States, and since then we have entered the ‘new normal’. Property has shown itself to be just as volatile and unpredictable as the stock market, but also giving some decent returns. In 2014 the returns from property outstripped the stock market. The stock market can be very volatile. It can bounce up and down percentage points on a daily basis.
Having those hard conversations early
According to some statistics, more than 50% of couples go into a marriage (or cohabitation situation) without having an in-depth financial discussion. I’m not talking about who is paying for what on a day to day basis, I am talking about the big stuff.
- How much debt are you bringing into the relationship? Full disclosure is imperative.
- How financially compatible are you? (Read HERE for more)
- How are you both going to saving for retirement? – I recommend it be equally split and if one partner has to take time off, to have or care for children for example, then the working partner should continue to pay into that retirement fund. On divorce your partner can claim up to 50% of the fund. When either of you moves job, call in your financial advisor to discuss the impact on your retirement fund and the alternatives.
- What marital regime will suit you best (see my recent blog HERE)?
- Don’t take shortcuts when listing your existing assets on your Ante Nuptial Contract. Include the current value of your retirement funds.
- If you’re going to inherit anything in the future, make sure your benefactor has a properly constructed will that removes the inheritance from the marital regime and that your ANC also excludes inheritances incase they don’t. In other words, anything you inherit irrespective of how you marry (ANC, Community of Property etc.), will always be yours. No sharing. If you do inherit after you marry, don’t mingle it with the family assets. This might be hard to do, but speak to your lawyer or financial advisor on how to do it.
How a marital regime can impact your wealth
When two people decide to get married, the marital regime, (the marriage contract – Ante nuptial Contract, Community of Property) is often the last thing on their mind. It’s uncomfortable to talk about, planning the wedding, the dress, the party, the cake, the honeymoon and all that other ‘stuff’ is exciting, why would you want to have a discussion about nasty splitting of finances if it all goes pear-shaped? There is also the misconception that Community of Property is the same as Ante Nuptial Contract with accrual. Not so. Today, more than 50% of marriages end in divorce, and nobody goes into a marriage thinking they might form part of that statistic. Financial strain is often at the root cause of marriage discord, and the sooner a couple discusses this ‘nasty’ topic, the better. Financial incompatibility is a real red flag to the longevity of a union. I always recommend at least one session with a financial coach to help facilitate those uncomfortable conversations without either party dominating or becoming defensive. This also applies during a marriage. If the family unit has financial difficulties or wants to make a large change or purchase, use a financial coach to facilitate the discussion for you.
Finding the sweet spot
At this time of the years there is a flood of emails from your investment providers imploring you to add to your retirement annuities (RAs) before the end of the tax year – should you?
That depends on where they are, and how long they have been sitting there.
Insurance platforms: The vast majority of RAs out there are currently invested on insurance platforms: The big boys, Liberty, Old Mutual, Sanlam etc. Most of these RAs were structured to give the broker maximum upfront commission (especially prior to 2007) and any increase in the annual amount and addition of lump sums is likely to expose those additions to penalties should they be matured ‘early’ or contributions stopped. Hint: this practice STILL continues.
Don’t do it.
Rather start a new RA on a LISP platform (Investec, Allan Gray, Sanlam Glacier etc) that doesn’t expose you to penalties. In terms of the pension fund act you can ‘retire from the fund’ from age 55. (No, you don’t have to retire from work at all!). Most of the insurance RAs will lock you in until 65, and penalise you if you want to shut it down earlier. If the RA was started before 2007, you could be penalised up to 30% of the market value of the fund! (Treating Customers Fairly anyone?).LISP platforms usually have a R1000 and R50 000 lump sum minima which might be problematic.
TESAs – a viable alternative
For once, there is a viable alternative to those nasty insurance-based endowments, that have (I.M.H.O) been a huge contributor to the shoddy reputation of investments among the middle class. Yes, billions of rands have gone into these funds which otherwise might well have been frittered away, but the legacy of ‘graveyard’ endowments – put in place for 50 years and STILL attracting up to 30% penalties if they are ‘matured’are still souring the market. Unfortunately, these TESAs aren’t going to do away with those termination penalties even on these new products, but the biggest advantage should be to the bottom line of the investment. Endowments are not ‘tax-free’, they are in fact taxed at 30% within the fund, not allowing the investor to use his or her interest and CGT annual rebates.Being a ‘middle class’ investment of choice for ‘education’ – with average interest rates well below 30% – this one of those ‘nanny’ policies I hate (read my blog HERE).
TESAs will be tax free. This could add as much as an extra 1% to the fund, which when compounded annually soon adds up. Retirement funds already have this advantage.With a bit of luck (let’s face it the government sometimes does a last minute about-turn) on 1/3/2015 these TESAs will be available on most platforms. I have yet to see any of the details of the structure and offerings from a provider yet – perhaps they are also anticipating a sudden about-turn too. After all, the government suddenly postponed the retirement reforms die to be implemented 1/3/2015 when Cosatu had a temper tantrum – most retirement platforms had already spent millions doing the changes that would have been required.
I have put the government report on my website, you can get it HERE
- Every individual will be able to invest R30k per annum ( this will increase with inflation)
- There will be a lifetime CONTRIBUTION cap of R500k. This does not include the growth of the investment. I have done a table to illustrate the potential growth:
- These TESAs are intended to be long term investments, there to supplement retirement savings and other long term goals rather than for short-term goals.Obviously retirement is an obvious goal, but an 18 yr investment for a child’s education is also viable. let’s face it in 18 year’s time who knows what the regulations will look like.
- Banks, asset managers, life insurance companies and brokerages will be able to provide these products
You will not be able to replace withdrawn amounts