Fixed Income

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What to do when you’re on a fixed income. Preparing for the eventuality.

The phrase ‘fixed income’ strikes fear into the heart of anyone anticipating retirement. The last thing any of us want is for that income to run out before we do. Making sure that doesn’t happen takes years, and decent investment advice, but irrespective if it is at age 65, 70 or older the chances are new ‘active’ income is going to stop flowing in and you’re going to have to start using ‘passive’ income (from whatever source). Thriving when your income is fixed (in other words just keeping up with inflation) is often a challenge especially when some aspects of your expenses exceed inflation (like medical aid) and force you to cut back. There is a limit to how you can ‘sweat’ those assets without exposing them to significant risk, so often consumption has to give. This is the ‘harvest’ period of your wealth lifecycle that you have been preparing for all your life.

Fifty years ago retirees were not expected to live much beyond 10 years after retirement at age 65, today you can easily live another 30 years, and this brings a whole slew of additional pressures to your fixed income.
The wealth equation goes like this:- Income minus Consumption equals Wealth. At retirement we are probably not adding to the Wealth side of the equation, so it must be managed properly and sustainably because it is going to feed back into the income – a closing of the wealth ecosystem/lifecycle as it were.

Before we get onto the consumption side of the equation, make sure that the fixed income is going to be structured properly. Diversify! Have a number of pots of wealth on the go, flexible investments, stock portfolios producing dividends, pensions/annuities, rental portfolios etc. If the ‘fire’ goes out under one of those pots temporarily, you aren’t going to starve. None of the pots are fireproof, especially not your own company if, like most entrepreneurs, you’ve poured all your investment into that. Every entrepreneur needs to have either an exit strategy that realises the wealth you’ve poured into the asset, or a solid succession plan that can produce an active/ passive income by way of dividends, director’s and consultant fees.

When you’re on a fixed income sometime in the future, the biggest issue from a planning perspective (with the new longevity norms) is additional capital expenditure. Usually this is a car and not a home, as capital from one house can usually be used to finance a new (cheaper) one if necessary. (It will have to be cheaper because you will be giving away around 10% of the capital to transfer duty, estate agents commission etc.) Cars are almost never an investment, they are a lifestyle expense pure and simple (the same applies to holiday homes). It is time to start thinking differently about that expense.

Let’s look at holiday homes – the ultimate ‘in your face’ to the Joneses – and if that’s what your ego needs, the answer is pretty clear (you don’t need financial advice, you need a coach). How can you sweat that asset? Probably by putting that capital into a rental property/properties that are in demand for more than 2 weeks a year. A R2m holiday home could be translated into three R600k units generating R18k pm, R216k pa. Even if half of that is eaten up in expenses, my guess is you can get a couple of pretty awesome holidays for R100k pa – and feed your aging body much needed flexibility and new experiences to keep you young.

The possibilities when it comes to cars and transport are exploding – and you don’t even have to wait for ‘public transport’ to catch up. Uber technology is just the start. If you haven’t tried this yet, why not forgo a rented car on your next holiday and use Uber instead. I did it recently and am a compete convert. Irrespective of the time of the day, I had a driver pick me up in less than 5 minutes. On many occasions I had a 2 year old little tagalong who got tired on a walk and the journey back was only a couple of kms – costing on average around R16. Our trips to the airport were less than the Gautrain.If you have Discovery Insure and Discovery card , discount that by another 25%. If you absolutely have to have your own car but it sits idle for most of the day – why not hire it out as an Uber car. Ride-sharing or Timeshare-for-cars is also coming. You might pay a monthly/annual fee to ‘sort-of-own’ your share of a car, and not unlike Pokémon Go, you can open your App and they will show you the cars around you that are ready to go on your ‘timeshare’, it will unlock the car of your choice and off you go. You then just get out, lock and leave. Both Audi and Toyota are actively testing and rolling this out in the USA, it is probably not far behind in major metropoles in RSA. It is interesting that car companies are anticipating how this will impact new car sales and are getting ahead of the curve.

Poor health has the potential to be the biggest drain on your fixed income. Never mind the ‘insurance’ you can take out, working on staying healthy is probably one of the best money saving hacks you can take advantage of. Medical aid inflation is probably going to exceed baseline inflation for the foreseeable future – what can you do about it? Firstly understand how Medical Aid, Gap cover and Trauma/Dread disease cover actually works. Every medical aid has a ‘hospital plan’ at the core of their product, everything else is just ‘extras’. You cannot be refused entry, no matter your health but you can be penalised for starting late (after age 35), have some waiting periods when changing. You need to identify just how ‘cost effective’ your current scheme is – are you paying over the odds for those extras (mostly day-to-day expenses). What if you took on those expenses yourself? The biggest risk for out of pocket expenses usually come from specialist fees (they are charging 500 – 1000% over medical aid rates) and trauma events (cancer, heart attacks etc). These risks can be covered by Medical Gap Cover – which is NOT a medical aid but a short-term product. Most of them have waiting periods, and a maximum age of entry (60, 65 or 70). Dread disease cover will give you a lumpsum for the nasties that can strike – often as you get older. One word of warning – make sure that the premium pattern (annual increase) isn’t so onerous that defeats the purpose of not eroding your fixed income. Go for a ‘level’ premium even if you hive that benefit off from the rest of your ‘life’ cover because the provider won’t let you use different premium patterns in one policy. (I know this sounds complicated but it isn’t, contact me if you want a more detailed explanation).

Action: So, in summary: As you are accumulating toward your fixed income days, focus on all 3 aspects of the wealth equation, not just one. Don’t fall into the trap of becoming an old stick-in-the-mud, rolling with the changes by being mentally flexible will make your life much less stressful

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Author Dawn Ridler © 

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