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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
This week, 38-year-old Tumisang stress tested his financial plan. Tumisang is financially astute – he puts money away for his children’s education so that he can pay the full year’s school fees in advance and benefit from the 10% discount offered by the school; he pays an additional R4 000 a month into his mortgage; he puts money into a bank investment account for emergencies and to pay for an annual family holiday; and he is responsible for providing for his father’s home.
Tumisang’s current employer provides a relatively good risk benefit for death and disability cover, and, although Liberty financial adviser Nyiko Mongwe identified that there may still be a shortfall should something happen to Tumisang, this would not be his first concern. The employer does not, however, offer critical illness cover.
Considering the high rates of critical illness such as cancer, heart attacks and strokes, this is cover that Tumisang may need to consider.
Mongwe’s recommendation is that Tumisang focus on education planning and retirement planning. According to Mongwe, it takes R2 million to raise and educate a child if the child goes to public school. One also needs to consider the fact that education costs are rising faster than inflation. Consumer price inflation to date is historically pegged at an average of 6% year on year, compared with education inflation at 9% year on year for the same period.
While Tumisang has life cover through his employer, this would not be sufficient to cover the education costs of his two young children should he be unable to provide for them.
Mongwe recommends the Educator, Liberty’s risk benefit that would finance the education of his two children in the event of the death or disability of either Tumisang or his wife.
“This is the most cost-effective way to hedge against educational inflation as it would directly pay for tuition costs, books and uniforms, and would free up the capital from the employer benefit to provide for costs such as food, clothing, transport and leisure,” says Mongwe.
In terms of long-term retirement planning, Tumisang needs to consider tax-efficient vehicles, as his current tax rate is 41%. There are several ways in which Tumisang can legally decrease his tax liability, including by paying into a retirement annuity.
Tumisang already contributes to a retirement annuity, but it is insufficient to meet his shortfall at retirement and he is not fully utilising his maximum tax deduction. Mongwe recommends that Tumisang increase his retirement contribution to enhance his retirement benefit and reduce taxable income.
Tumisang says: “The information provided by the financial adviser has been very informative.
“I realised that, while you can never save enough, the sooner you start, the better.” He adds that he now has a better understanding of his financial portfolio.
“Financial freedom is possible with financial discipline and education.”
