You may feel that you are on top of your finances and are managing your day-to-day money, but how robust is your financial plan? Are you on track for retirement and what protection do you have if life turns upside down? Ahead of Financial Planning Month in October, Liberty challenged four City Press readers to test their long-term financial plans by offering a financial needs analysis #RealLifeAdvice
Ryan is in his mid-twenties and about to complete his articles. Being financially minded he has focused on investing and avoiding taking on too much debt. He received a small inheritance which he immediately invested in a portfolio of exchange-traded funds (ETFs) and continues to save each month into a tax-free savings account which invests in ETFs. Ryan has R90 000 of outstanding car finance and a credit card with a balance of R10 000. “I try to buy ETFs whenever I feel I have enough to reduce the brokerage. However, sometimes I end up spending that money on bicycles as I am an avid cyclist.”
Ryan is concerned that he is not taking advantage of the tax benefits offered by a retirement fund, as his company does not offer one. He also wants to create a longer-term investment plan to reach his goal of having a capital amount of R1 million by the age of 30.
Liberty Financial adviser Carlo Gil was very impressed with Ryan’s savings discipline, but he was concerned that Ryan had very little protection if he was unable to work.
“Risk benefits are always a priority; we need to protect our income first before anything else.”
As Ryan has no dependants and little debt, his life cover – provided through his company – is sufficient to meet his needs. Of greater concern is if Ryan becomes ill or disabled, because he would need income for the next 30 years. Gil recommended that Ryan take out Liberty’s Absolute Income Protection as well as a lump sum benefit in the case of disability. Gil also recommended that Ryan take out a dread disease policy (a critical illness benefit).
“Living Lifestyle Plus is a fully comprehensive dread disease cover with top-up and extended cover. I strongly recommend this cover to Ryan as he has no exiting provision for this and, unfortunately, claim stats now show one in three people will most likely have a dread disease. As Ryan plans to travel once he has completed his articles, it is important to note that this policy will cover him while he is overseas.”
As Ryan has no provisions for retirement savings, Gil recommended he consider a retirement annuity to maximise his tax benefits as the SA Revenue Service allows an individual up to 27.5% of their gross salary as a deduction.
Gil recommended the Stanlib Retirement Annuity which is a flexible investment that would not penalise him if he changed his contributions. It has a large variety of portfolio selections and has a very competitive platform fee of 0.5%.
In terms of Ryan’s goal to increase his investments from R250 000 to R1 million by the age of 30, he would need to save around R11 000 a month for the next four years. As this would exceed the amount he could save in a tax-free savings account, Gil recommended an investment builder. “The term is over five years that will allow the full tax benefit of an endowment. As an endowment is taxed within the fund at the fund rate of 28%, depending on Ryan’s tax rate, it may provide a higher after-tax return than if he invested directly into unit trusts, for example.