NFB FINANCIAL UPDATE Issue68 June2013
FROM THE CEO’s DESK
I Mike Estment BA, CFP® CEO - NFB Financial Services Group
IN THIS ISSUE Front Page: From the CEO’s desk Center Page: Have I made sufficient provision for death, disability and retirement? Back Page: Retirement investments
recently read a great review from our friend and highly-rated portfolio manager, Kokkie Kooiman, of Sanlam. Kokkie, like quite a few of our leading money men and women, has attended the “Sage of Omaha”, Warren Buffett's, Annual General Meeting and presentation to their clients. I will repeat, for the record, that I firmly believe that provided you understand your goals, accept the risk of volatility and stick to your guns, making investments into “risky” assets likes stocks, property and bonds will outdo both cash and inflation over any meaningful period. The other, often overlooked, basic truth is wherever tax is due, this further reduces the net return. I get reasonably irritated when listening to the radio or watching TV and I hear an advert by our banks, which goes something like: ”Buy a fixed deposit at 5% fixed for a year, no commissions, and no costs”. Unsaid is the fact that whilst their advert doesn't tell a lie, they forget to tell you that whilst you take the risk of the bank folding, they lend your money to their clients at 10% or perhaps more! They also forget to tell you that cash rates (call) often closely track inflation. The only problem is that inflation doesn't pay tax and we do! This implies that without drawing a cent of income, you are losing out in the buying power of your portfolio. If you need income, typical of our retired clients, you might be on a hiding to nowhere. So what, I say! From the above it seems obvious that given a little knowledge, a little time and a little money, we can all retire secure in our wealth as long as we avoid bank deposits! Not so fast, there are a few basics which Kokkie and I agree with as tickets to that game. The basic rules are: 1. Understand the principles of investing. Keep these simple. Understand the investment decision and stick to your guns, letting compound returns do their magic. 2. Understand yourself, your goals and your weaknesses. Avoid greed and fear as they are poor bedfellows of successful investing. Clearly, if the investment is just for the short term, or is a liquidity buffer in case of emergencies, cash is king. Even though interest rates are low, they are positive. Applying money you need inside of a few months to a growth oriented portfolio makes little sense as markets might move into negative territory in the short term, resulting in a loss when you want to use the funds. For the very high bracket tax payer, there are products which produce dividends, but don't have a very volatile price. These might be better suited, giving you the best of both worlds. Both locally and globally, we like to focus on managers who buy top companies. These also go through tough times as the economies of both South Africa and the world go through growth and contraction, but they tend to have top management, capable of swimming against the tide in tough times, and typically leveraging good times. Sometimes these companies are picked up early by great money managers. These add further in the way of extraordinary returns. However, portfolios which focus too
heavily in middle and small cap stocks can get severely punished when markets show weakness as they are very illiquid. Looking at Berkshire Hathaway and other contrarian managers, you will most often see large, quality companies occupying top of the pops status as well as being in the vast majority in overall value. Leaving stock selection up to the professionals is important or requires a keen interest, loads of time and dedication to get right as an individual. It also needs a healthy understanding of Basic Rule 2 above, where fear and greed rule. Taking a good look at top portfolios often shows core, quality holdings with limited changes taking place. These occur typically where something has changed, as change is one of the few constants. This might be where a stock overshoots the manager's expectations and is just too good to be true or where the company or its management changes from the indicated strategy which made the manager choose them in the first place. Top managers know their stocks well. Like Buffett, they also treat the companies as real investments, rather than stock certificates. They visit them, kick the tyres, are trusted investors and even at times have roles on the Boards of Directors. It is also key to realize that the future is unknown, and where someone dictates to you exactly what the winners will be, leave quickly. Buffet's long time partner, Charlie Munger, says “we deal with the future and the future is unknown”. Accordingly they invest in the company and its people, both are tangible, readable and able to adapt to the future. As an example of the compounding of capital, I have asked one of my associates to put together a graph to compare a top money type fund with a balanced mandate fund which is on NFB's list of approved funds. The difference in three years is nice, in five years is less significant (given the big market correction we went through), but look at the ten year numbers. They scream out loud that compounding, quality and patience are always rewarded. Before allowing my ramblings to have you change your call funds to balanced funds, you need specific advice. Please engage with your wealth manager in this regard.
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fortune favours the well advised
Have I Made Sufficient Provision for Death, Disability and Retirement?
Image credit: 123RF Stock Photo
The heading to this article is a question often posed to financial planners, often expecting an answer based more on a hope than one based on facts. By Glen Wattrus, NFB East London, Private Wealth Manager
a client would need to do a detailed analysis of expenses such as bond repayments, education requirements, rates and taxes, as well as water and electricity, groceries, travel and entertainment, tithes and any other expenses beyond the obvious. Morbid as it may sound, death is the easiest aspect for which to plan and the easiest to implement. One merely needs to establish the level of
T
here is never an easy answer to the question as there are so
many factors that need to be taken into account when arriving at a possible solution. Furthermore, this answer is never a line in the sand as a multitude of factors influence the outcome and the end result is a shifting goalpost. There is never a once-size-fits-all answer, but I will visit a number of aspects that I would take into account when trying to provide a client with an answer at that particular point in time. Ideally, one's financial position should be revisited every two years to ensure that any intervening factors have not significantly altered your planning. To arrive anywhere near a
satisfactory answer, a client would need to do a fair bit of homework on nett amount required to live according to their lifestyle on a monthly basis, preferably after taking income tax and medical aid into account. In my calculations I prefer to exclude these two: tax for obvious reasons, but medical aid is excluded as the inflation rate on this grudge purchase is significantly higher than the usual rate of inflation. A recent article in this publication highlighted the silent killer that is inflation, but even more so inflation on medical expenses. A 2% variation over a life span of 30 years for medical aid needs has a mindboggling effect on the end result of capital required. Thus
cover required and then shop around for the most appropriate quote. Life cover costing, over time, has become progressively more competitive and a policy that was purchased 10 years ago may be significantly more expensive than one sold at current rates. Be aware, though, that premiums may escalate at a higher rate than the original policy and there may be exclusions relating to certain medical conditions. Disability is somewhat more problematic to address as it would encapsulate ensuring that any monthly income does not exceed 75% of what the client was receiving prior to becoming disabled. This is an industry-related matter and is basically implemented to “disincentivise� (if there is such a
word) people from claiming to be disabled and being in the same
asset class can claim to be devoid of risk. Particularly in the residential
position as if they were working. The level of capital disability required would only be realistically
market there is a particular risk of a tenant defaulting on payments and upkeep of this class of property is
ascertainable when the client's special needs have been determined after the disabling event. For instance,
usually more intense than the other types. In our planning we do favour property exposure, but certainly in a
a specially adapted vehicle may be required or alterations made to the
diversified asset class offering instead of in an exclusive one. Along
home to accommodate any physical needs. Certainly in cases like these it is better to prepare for the worst, but
with property we would prefer our client has exposure to asset classes that offer a good income stream, along with the probability of an increase in capital value should the client be a retiree.
trust for the “best”. Although strictly speaking dread disease provision does not fall into this category I would urge every reader of this article to seriously consider adding this cover to their policy. Yes, it is usually frightfully expensive, but one should bear in mind that this type of cover is usually unobtainable after a dread disease
effort to cut out any unnecessary expenses. Older clients will be familiar with the term “a penny saved is a penny earned” and this is particularly apt in the area of financial planning where the effects of compound interest are most evident. Remember that knowledge is power and it is crucial that you know where you stand in terms of your financial planning and do something about it rather than fear where you may be and avoid the issue as best you can as you are certain that you will not like the answer. To obtain clarity on your position please talk to your NFB financial advisor.
How then should we approach retirement provision for the client in
illness has surfaced, or it is available at prohibitive rates thereafter. The final aspect to consider, and certainly the most problematic, is ensuring that one has made sufficient provision for the retirement years or, if those are already upon you, to ensure that they are sustainable for the remainder of your life. How often does one hear that the answer to a happy retirement devoid of worry is Property, Property, Property.............This may well be true if the person making the statement has a particularly large property portfolio that is well diversified across office, commercial and possibly residential areas, but no
the accumulation phase of their life? Number-crunching can lead to a feeling of despair when the client looks at the “here” picture and sees how much capital is still required to get to a position where a sustainable income can be expected upon retirement. Inflation and expected returns are assumptions, nothing more than that, in planning for the future. One should view any answer to the question posed at the beginning of this article as a starting point to achieving the respective goals. More often than not the amounts required may seem unachievable, but start with whatever is possible in terms of
Glen Wattrus B.Juris LL.B, CFP® Financial Paraplanner - NFB East London
your budget and make a concerted
NEW APPOINTMENT TO THE BOARD
T
he Directors and staff of NFB Gauteng
progressing into a senior role in the Advisory
take pride in announcing the appointment of Stephen Katzenellenbogen to the Board of
business. Steve's focus has been on developing a High Worth client base and interacting with Accountants and Auditors
Directors with effect May 2013. Steve has risen through the ranks at NFB having been involved in our Asset Management Division for a few years and
Stephen Katzenellenbogen B.Com (Hons), CFP®, Adv PDFP Director/Private Wealth Manager - NFB Gauteng
with whom NFB enjoy excellent professional relationships. We look forward to Steve continuing his growth and to him making a material contribution at Board level.
Retirement Investments Retirement investments are an integral part of an investment portfolio. The rationale behind these investments has often been criticised, however, when their features and considerations are understood in conjunction with each other, these investments are an enhancement when appropriately structured into a portfolio. By Nina Joannou, Trainee Financial Advisor - NFB Gauteng
Considerations Liquidity: Retirement assets are illiquid prior to age 55 thus there should be sufficient liquidity elsewhere in a portfolio before considering an investment into retirement assets. Upon retirement, up to one third may be withdrawn as a lump sum whilst the remainder will be transferred to a living
saving on income tax, a 13.3% saving on capital gains tax and a 15% saving on
Variables
dividend withholding tax. Below is a
Original Value
Asset Allocation:
Value @date of death
R 23 406 484 R 30 624 927
CGT
-R 1 751 245
R0
-R 933 919
R0
a retirement annuity. The underlying investment portfolio and platform fee is identical for both investments. This is solely and the powerful impact of compounding. Year
Unit Trust
Investment
R 5 000 000
1 2
Guidelines of the Pension Funds Act in terms
3
of asset class exposure. These assets cannot
4
have an equity exposure of more than 75%,
5
a property exposure of more than 25% and
6
a foreign exposure of more than 25%. This
7
limitation can easily be managed in
8
off the impact of the Regulation 28 requirements. Beneficiary Nominations:
Retirement Annuity R 5 000 000
trustees who must sanction these, giving consideration to other dependants of the investor.
Features Compounded Returns: Retirement investments are not subject to any tax on the growth generated by the underlying investment portfolios. This means
Image credit: 123RF Stock Photo
that there will be no income tax, no capital gains tax and no dividend withholding tax applicable. For the high net worth individual, this can be translated into a 40%
Estate Duty
-R 4 144 264
R0
Net Value
R 16 577 056
R 30 624 927
* The example assumes that the estate duty abatement of R3.5 million has already been used and that, within the unit trust, capital gains tax has been applied at 13.32%.
The net value available to the investor's family is approximately R14 million more in the retirement annuity. The impact of the tax efficient compounded returns as well as pro-active estate planning has thus saved the investor approximately 280% of the original investment amount.
9 10
R 23 406 484 R 30 624 927
*The example assumes that there is a 40/60 split
What's next? New legislation has recently been promulgated which will further enhance
between income and capital growth and that
the impact of retirement investments. The
income, within the unit trust, has been taxed on an
impact of these changes, in conjunction
annual basis at 40%.
with current practice, potentially represents
Although the investment allows for nominated beneficiaries, the fund has
Executor’s Fees
the result of the favourable tax treatment
Regulation 28 of the Prudential Investment
one could adjust other investments to set
Annuity R 5 000 000
investment of R5 million into a unit trust and
Retirement annuities are governed by
conjunction with your advisor. If necessary,
R 5 000 000
Retirement
simulated example of a ten year
annuity to generate a regular income for the annuitant (the investor).
Unit Trust
a material saving to you and your family. To Within the retirement annuity, the investor
learn more about this exciting opportunity,
has generated approximately R7.2 million
please contact your NFB Private Wealth
more than within the unit trust, which
Manager.
represents almost 145% of the original investment.
Nina Joannou B.Com (Hons), B.Sc Trainee Financial Advisor - NFB Gauteng
Estate Efficiency: Retirement assets are not subject to estate duty or the associated costs on death. This translates into a 20% saving on estate duty, up to 3.99% saving on executor's fees and up to 13.3% saving on capital gains tax. Revisiting the example we used previously, these savings are illustrated as follows:
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