Long-term perspective is more than just investment

2014-08-04 08:00

We need to ensure the sandwich generation is a one-off phenomenon, writes Kagisho Mahura

In 1974, sociologist Edward Banfield of Harvard University wrote a book titled The Unheavenly City. In it, he described one of the most profound studies on success and priority-setting ever conducted.

Banfield’s goal was to find out how and why some people became financially independent during the course of their working lives.

He finally concluded that the major reason for success in life was a particular attitude.

Banfield called this attitude “longtime perspective”. Time perspective referred to how far you projected into the future when you decided what you were going to do or not do in the present.

One example given in the book was the choice facing many school-leavers: to get a job or study further? A short-term perspective would point to getting a job as it would ensure income a lot sooner than if one studied first.

But research has shown that over the duration of a career, the average skilled or qualified person can earn more than double that of the average unskilled worker, despite starting to earn an income several years later.

This attitude of a long-term perspective was often found in successful entrepreneurs and executive managers in large corporations.

The ability to take a longtime perspective sometimes leads to decision-making that does not make sense for outside observers who often have a short-term perspective when judging such decisions.

Longtime perspective in the SA context

There are several challenges facing black professionals today. The first is that many, especially those aged between 30 and 50, find themselves funding not only a middle class lifestyle for themselves and their immediate families, but funding extended families and aging parents.

They are typically known as the “sandwich generation”.

Before 1994, our parents did not enjoy unfettered economic access or quality education opportunities and were largely excluded from the formal savings environment.

A 65-year-old today would have been at their economic prime from the 1970s to the 1990s.

This means that this age group largely missed out on the opportunity to harness the power of compounding interest to help fund their retirement.

The challenge of providing for their retirement now falls largely on their children, those aged 30 to 50.

The second challenge is that life expectancy in South Africa for people over the age of 60 has been increasing, especially for those people with health insurance and access to private healthcare.

This means provision for retirement is expected to become even more expensive for this sandwich generation as inflation starts compounding.

Middle class South Africans also face the reality of funding a “parallel economy”, where they pay a premium for services that their taxes should ordinarily cover.

So a large part of their budget goes to health insurance, private or semiprivate education, armed security, private transport and alternative energy costs.

Many of these expenses tend to rise at a rate higher than inflation, while the middle class continues to expand and demand increases.

How then, as a black professional, do you apply Banfield’s thinking when you are being squeezed from both sides and discretionary funds are in short supply?

As one who falls squarely in the sandwich generation, I have personally come to the conclusion that I am unlikely to achieve the kind of financial freedom Banfield referred to in his study.

Building wealth while funding two retirement plans (mine and my parents), as well as funding a middle class lifestyle for my kids, is likely to be a mountain too high to climb.

But I can organise my affairs to ensure my children never find themselves in the sandwich generation of their time.

My role has changed from building personal wealth to ensuring a dignified retirement for the previous generation and setting up the next generation to be the real wealth creators of the family.

So my planning is different to that of the professionals my age whose parents can fund their own retirement and whose grandparents started education plans for their kids.

Financial planning for the sandwich generation

Professionals with a longtime perspective would have more retirement savings rather than discretionary savings. This ensures they will not be a financial strain on their kids upon retirement.

Their financial plans are also likely to have a disproportionately higher risk cover (death, disability and dread disease) – to reduce the likelihood of relying on their children for financial support and also to leave a large cash legacy in the event of death.

The higher associated risk premium leaves less funds available for personal wealth creation, but arguably creates significantly more wealth for the next generation.

I, and many of our clients, have not given up on the prospect of achieving financial freedom during my working lifetime. We will continue nurturing our ambitions, working hard and trying to create personal wealth in the process. But this is not the primary objective of our financial planning.

The proverbial hand has been dealt and now we need to play our cards right. We can either moan about the unfairness of finding ourselves part of the sandwich generation, or we can ensure that it is only a one-generation phenomenon. I suspect Banfield would agree.

» Mahura is an investment and retirement planning specialist at Gradidge-Mahura Investments

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