PRE RETIREMENT PRESENTATION FEB 2012€¦ · • Is not advice as contemplated in the Financial...

PRE RETIREMENT PRESENTATION

12 August 2013

Agenda

Your presenter

Ken Russell

Experience:

27 years in the Financial Services

industry

Joined Alexander Forbes in 1993

Qualifications:

Post Graduate Diploma in Financial

Planning (UFS)

Advanced Post Graduate Diploma in

Financial Planning

CFP®

Financial advice and the law

• The profession is highly regulated (FAIS and FICA)

• Practising professionals are governed by the Financial Advisory and

Intermediary Services Act

• Practising professionals must be licensed and registered with the

Financial Services Board

• Cannot receive financial advice before certain disclosure and

procedural requirements have been met

• Advice requested should be documented and recommendations

presented in writing

• May not give personal financial advice in this public forum

Advice disclaimer

• Alexander Forbes is a licensed financial services provider in terms of

Section 8 of the Financial Advisory and Intermediary Services Act, 37 of

2002, as amended.

• Any information in this presentation relating to any product:

• Is a factual and objective description of the product

• Does not constitute an express or implied recommendation, guidance or

proposal that any particular transaction in respect the product is

appropriate to your particular investment objectives, financial situation

or particular needs

• Is not advice as contemplated in the Financial Advisory and

Intermediary Services Act

• Alexander Forbes shall not be liable for any damage or loss suffered

resulting from any action taken by any person based on this presentation or

any discussions relating to it.

Preparing for retirement …

The use of time

Health

Residence Relationships

Safety and security

Retirement lifestyle

Less than 10% of people will retire

with enough income

Plan ahead

Identify opportunities

Acquire knowledge and skills

Prepare yourself

Extra income – a time of opportunity

• Being productive keeps us healthy and energised

• Many people generate more income in their retirement because

they have freedom of choice and time to research and identify

new opportunities

• Turn your hobby into an income-producing activity

• Consult in your field – offer your expertise to your industry

Start your own business

or buy an existing

business but

NEVER put

retirement

capital at risk!!

Savings

Pensioner

discounts

• Don’t let pride stand in

your way

• Insurance companies

normally issue a

pensioner card for their

annuitants

• Identify retailers that

offer pensioner

discounts

• Municipal discounts?

• SAARP. Can join before

retirement.

Financial planning: let’s get to the money side

of it…

Retirement is:

Retirement planning – a lifetime of choice

You will earn

480 salaries

over that

period

At age 50,

you have

120 salaries

left

These salaries must finance another 300 post-retirement salaries, your monthly pension

Retirement planning spans 40 years of employment

Retirement planning - Primary Objective

Replace 70% Of My Final Salary

1. Work for 40 years! (480 salaries)

2. Contribute 12 to 15% of each salary (pay

yourself first)

3. Invest in a market-related investment portfolio

over that time

If I only start saving at age 40…

I will have to save 39% of all my income

Up to age 60

To replace 70% of my final salary

Retirement planning - Primary Objective

Replace 70% Of My Final Salary

1. Many people faced with a much lower NRR (net

replacement ratio) than 70%. How much lower

can you go?

2. If you have saved well and have achieved for

example a 60% NRR, this could in reality be

much lower if you take one-third as cash.

Family holidays

Leaving money for

heirs

Certainty of monthly

income

Capital preservation

Maximising return from investment

Golf

The best post-retirement strategy?

What are your objectives in retirement?

Family holidays

Leaving money for

heirs

Certainty of monthly

income

Capital preservation

Maximising return from investment

Golf

The objective

should be to

sustain a standard

of living

throughout

retirement


Four financial objectives at retirement

75% or more of your final pensionable

salary

Having an emergency cash fund

Being debt free

Having post-retirement medical cover

You need a plan to achieve each objective

Achieving financial security by winning the lotto is

less likely than being bitten to death by a donkey!

20

Birth Birth

15

15 years not working

65

50 years working

75


33%

67%

18


62

44 years working

85


1950’s Now

49%51%

21

Birth Birth Birth

15


65

50 years working

75


33%

67%

18


62

44 years working

85


20


60

working

90

bonus years

49%

18%

33%

36%

1950’s Now Future?

51% 49%

retirement

On a positive note

If you haven’t saved as much as you

ought to have done:

One good thing about being poor is that

when you are seventy your children

will not have declared you legally

insane in order to gain control of your

assets!

Woody Allen

Finanical Planning for retirement – Where to start?

Do you have a financial adviser to show you

the way?

Step 1

• What will my retirement income be and how much do I need?

• How much am I short?

Planning – where do I start?

Remember to budget

Things to consider…

I must include the following in my calculation:

• Personal circumstances

• Married or single

• Dependants or none

• My retirement fund

• Preservation funds

• Retirement annuities

• Other assets (including your home) and savings

• I have a plan to continue working after I retire

• I have regular overseas holidays to visit the children

• I want to retire three years early

What's the next step?

Step 2

• I need to determine how much extra I can save by doing a budget

What's the next step?

• I must allocate those savings to meet the following objectives:

– Increasing my retirement savings to meet any shortfall in income

– Providing for an emergency cash fund at retirement – Paying off all conventional debt by retirement date – Providing for post-retirement medical cover

Step 3

Finally…

Step 4

I need to choose the right savings vehicle and investment

strategy for each of my four retirement objectives

Do not make financial decisions in isolation

Consult with an accredited financial advisor

Review your plan regularly to ensure you stay on track

Savings options…

Pre-tax retirement fund savings options?

Company

Retirement

Fund

Retirement

Annuity

Preservation

Fund

Pension Provident Pension Provident

Pension fund… Retirement annuity?

Pension fund/provident fund Retirement annuity

Regulated by Pension Funds

Act and Income Tax Act

Need to be employed to join

Employee and employer both

contribute

Interest and rental income

earned by the investment

portfolio is not subject to tax

Compare this to the interest

and rental income earned by

the investment portfolio in a

unit trust or endowment

Identical to pension fund, but

Membership not dependent

on employment

Retirement fund options

• Can take 1/3 in cash

• Balance must be used to

buy a pension

• Part of cash withdrawal

is tax-free

What is a preservation fund?

• Preserves accumulated savings when leaving a fund

before retirement date

• No tax payable on transfer

• No ongoing contributions can be made

• One withdrawal allowed before 55, which will be subject to

tax:

• First R22 500 Tax-free

• Next R577 500 18%

• Next R300 000 27%

• > R900 000 36%

Media24 Retirement Fund

• It is a compulsory condition of employment that permanent full-time

salaried employees joint the fund (unless member of another fund

within the group.

• Normal Retirement Age is 60 unless otherwise agreed. Or 65 or 63

years old for members who joined service prior to 1 January 1999.

• Early retirement can be from age 50

• At retirement you must use at least two-thirds of your fund credit to

purchase a pension.

• If you retire you cannot transfer your fund credit to a preservation fund

or a retirement annuity.


• Member contribution 7.5% of pensionable emoluments.

• Employer contribution 10%of pensionable emoluments.

• 3% of the employer contribution goes toward risk benefits and other

costs in operating the fund

• 7% of the employer contribution goes toward actual retirement savings

in the fund.

• All of the member contribution goes toward retirement savings.


• You can increase your employer contribution to the fund by restructuring

your package.

• You can choose to increase your employer contribution to 13%, 15% or

17% of your pensionable salary.

• As this is an increase in the employer contribution it is tax-effective – that

means it is a pre-tax contribution.

• Investing into your occupational pension fund is probably the most cost-

effective way there is to save for your retirement.

• You can transfer money to the Media24 fund from previous employer funds

or preservation funds

• You an also make additional voluntary contributions (AVC’s) to the fund.

The tax deductible limit on this is R150 per month.


• Default portfolio is the Life-stage portfolio.

• This assumes that the closer you are to retirement, the more

conservatively your money should be invested so as to avoid sudden

loss of value when you reach retirment.

• When you eight years or less from retirement, the phasing-in from the

Growth to the Stable portfolio will begin (unless you opted out of Life-

stage).

• Life-stage may not be appropriate for you if:

• You plan to use a living annuity

• You don’t mind taking more risk

• You plan to retire early


Phasing in from Growth to Stable

Growth Balanced Stable

More than 8 years 100%

7 to 8 75% 25%

6 to 7 50% 50%

5 to 6 25% 75%

4 to 5 100%

3 to 4 75% 25%

2 to 3 50% 50%

1 to 2 25% 75%

0 to 1 100%

What are my after-tax savings options?

Cash Mortgage

bond

Endowment

policy

Share (equity)

portfolio Unit trusts Offshore

investments

Cash

• Predictable return

• Meets liquidity requirements

BUT

• After-tax return could be below inflation

• Loses real value over long term

Short-term security

Pay your bond off early

• Guaranteed taxed return at prime lending rate

• Aim to settle your bond before your retirement date

• Reduce your interest payable by reducing the term of the

bond or by increasing the installment

• Having a paid-off home by retirement age gives you the

added flexibility of using a home equity release product in

retirement

Good investment strategy

Endowment

• Five-year term

• Interest and rental income taxed at 30%;

• CGT at 33.3% inclusion rate – Tax paid by the insurer on your behalf. NB – NOT tax-free

– Check against your tax rates to see whether viable

• Wide choice of investment portfolios

• Low risk to high risk – check your risk profile

At maturity, the investor can choose to:

• Cash in the policy tax-free

• Extend the term of the policy

• Draw income in the form of multiple or ad hoc

disinvestments which are tax-free

Unit trusts

• Over 900 unit trusts in South Africa

• Before you choose – Determine your risk profile

– Determine your investment term

– Determine your overall investment strategy

– Invest with established investment houses

• Taxation – Interest is taxed in investors hands

– Dividends taxed at 15%

– Capital gains tax is payable on disposal in investor’s hands

If you are looking for short-term profit,

you are speculating, not investing

Share or equity portfolio

Options

Manage own share portfolio

Pay someone to manage your portfolio

Large amount required to run a successful portfolio

Remember

Direct investment in shares is risky

Long-term investment (three to five years minimum)

Understand your objectives

Check tax implications

Actively manage

Investment returns can be volatile

in the short-term

Offshore investments

An offshore investment should

not be a short-term

bet on the future direction of the rand

• Investors can make use of annual R4 Million foreign investment

allowance – SARS tax clearance certificate required

• In addition South African residents can make use of R1 Million

single discretionary allowance – without SARS clearance

CASH FLOW AFTER RETIREMENT

Pension/

Provident

Fund

RAs

Unit

Trust

Tax free

portion

OR

commutation

Money

market

Lifestage

Annuity

OR

Fixed

Annuity

Endowment

TOTAL

MONTHLY

INCOME

Preservation

Funds

Rental

Income/

Consulting/

Other

Back to your compulsory savings

1. If I take a cash lump sum how much tax will I pay?

2. Can I afford to lose the income by taking cash?

Tax on taking cash

Tax legislation

• R0 to R315 000 is tax-free

• R315 001 to R630 000 is taxed at 18%

• R630 001 to R945,000 is taxed at 27%

• More than R945,001 is taxed at 36%

NB: The lump sum formulas will be applied on a cumulative

basis over the taxpayer’s lifetime.

The first R315 000, less any previous amounts taken

tax-free on any other retirement funds, will be tax-free.

The more cash you take, the more you deplete your potential

income.

Taxation of Annuities

• The capital transferred from your pension fund, provident

fund or retirement annuity to your annuity is not taxed

However…

• The monthly pension (annuity) you receive is taxed in your

hands as the annuitant

Annuity Options

You’ve decided on a lump sum,

now which annuity do you choose?

What are the major risks in retirement?

living long (possibly running

out of income)

pension income not keeping pace

with inflation

consuming more than what your

financial plan can sustain

making inappropriate investment decisions

Consider the major risks in retirement…

Longevity risk

Living long (possibly running

out of income)

Advances in medical science

Fact: medicine is extending our life spans

Consider the major risks in retirement

Longevity risk - Taken from the Treasure discussion paper.

One such factor that could require policy intervention

is underestimation of longevity. Many people

contemplating the purchase of a conventional life

annuity probably do not know that the apparently

low income paid by the annuity reflects, in part, the

amount of money they can afford to spend given

their expected longevity and current rates of return

on financial assets. This lack of understanding might

cause them to undervalue the protection that

conventional life annuities offer.

Syd Prior, until

recently the

oldest recorded

full-time

employee in the

world finally

retired in 2011, a

few days short of

his 97th birthday.

People are living longer…

Many may need to return to work or defer their retirement date

What if your broker gambled with your life?

What if he/she put you in an arrangement whereby you had a more

than even chance of having virtually no income later in retirement?

Longevity of a different kind.

Investment return net of all fees.

Income rate selected 2.50% 5% 7.50% 10% 12.50%

at inception

2.50% 21 30 50+ 50+ 50+

5% 11 14 19 33 50+

7.50% 6 8 10 13 22

10% 4 5 6 7 9

12.50% 2 3 3 4 5

15% 1 1 2 2 2

Longevity – again!

Assume a married couple.

Male 65, female 60

Chances of one of them living for thirty years is 51.7%

Chances of one of them living for thirty five years is 32%

Is this a gamble you are prepared to take?

Inflation risk

R1 000 buys …

1970 1980 1990 2010 2020

“Inflation is when you pay $15 for the $10 haircut you used to get for

$5 when you had hair.” Sam Ewing

WHAT TO CHOOSE??

Hang in there...

help is on the way!!

Understanding the solution

Life annuities Living annuities

Life Annuities

Only financial

contract that

provides insurance

against longevity

Appropriate type can

hedge inflation risk

Living Annuities

• Flexibility allows

income

requirements to be

met

• Appropriate portfolios

mitigate investment

risk

Conventional guaranteed life annuities

Level • income does not

increase

Inflation-linked

• increases with rate of inflation

Escalating • increase by a %

each year

With-profit

• increases determined by insurer – depends on investment returns (initial income differs)

Insurer agrees to pay an income for life

Level or escalating pension: example

Year No

increases

Buying

power

5%

escalation

Buying

power

1 R5 000 R5 000 R3 500 R3 500

5 R5 000 R4 114 R4 254 R3 500

10 R5 000 R3 223 R5 429 R3 500

15 R5 000 R2 525 R6 929 R3 500

20 R5 000 R1 979 R8 844 R3 500

25 R5 000 R1 550 R11 287 R3 500

30 R5 000 R1 215 R14 406 R3 500

Assume a 5% escalation and 5% inflation

SORRI Measure

Real income received through time

R 1,000

R 9,000

R 11,000

R 12,000

R 13,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Years

Rea

l a

mo

un

t

R 10,000

R 8,000

R 7,000

R 6,000

R 5,000

R 4,000

R 3,000

R 2,000

Escalating pension. Is it worth it?

Male of 60, female 56. There is approximately a

50% chance that one of them will still be alive in 35

years time!

Impaired Annuity

Individually underwritten annuity – lifestyle underwriting & medical underwriting

Current income, occupation and smoker status can lead to an enhanced income

Linked to the lifestyle and medical underwriting, you can receive up to a 100% income enhancement

Based on a guaranteed fixed annuity product but with individual rates

Added benefit of capital protection on death via an estate protect benefit

Impaired Annuity…

Impaired annuity improves a client’s quality of life

A recent case - Client had a severe stroke

Normal joint pension R8133 p.m. + 5% escalation

Impaired annuity R11 954 p.m. + 5% escalation

CLIENT RETIRED!

Impaired annuity showcase

A recent case - Client had a serious operation

Normal joint pension R7 235 p.m. + 5% escalation

Impaired annuity R10 478 p.m. + 5% escalation

Living Annuity

Income • min 2.5%

• max 17.5%

Upon death

• remaining capital is left to beneficiaries

Invest capital and draw an income

annually

Longevity of a different kind.

Investment return net of all fees.

Income rate selected 2.50% 5% 7.50% 10% 12.50%

at inception

2.50% 21 30 50+ 50+ 50+

5% 11 14 19 33 50+

7.50% 6 8 10 13 22

10% 4 5 6 7 9

12.50% 2 3 3 4 5

15% 1 1 2 2 2

SHOULD YOU TAKE ON MORE SHORT-TERM RISK?

This slide shows the effect of high withdrawal rate and how it may fare with a

conservative versus a more aggressive strategy.

Assumes R1,000,000 capital and R70,000 withdrawal (7%!) with inflation increases.

Returns on types of investments

-

20,000

40,000

60,000

80,000

100,000

120,000

De

c-7

1

Dec-7

3

De

c-7

5

Dec-7

7

Dec-7

9

Dec-8

1

Dec-8

3

Dec-8

5

Dec-8

7

Dec-8

9

Dec-9

1

Dec-9

3

Dec-9

5

Dec-9

7

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

De

c-1

1

Based

on

R100 a

t en

d o

f D

ec 1

971

40 years

Equities ( 19.4% p.a.) Bonds ( 11.7% p.a.) Cash ( 11.8% p.a.)

Property ( 17.4% p.a.) Inflation ( 9.9% p.a.)


Life annuities Living annuities

Flexible income options

Appropriate portfolios mitigate

investment risk

With financial advice, mitigate

consumption risk Poor

management – longevity risk, consumption

risk, investment risk

Expensive (low income

at outset)

Inflexible, inflation risk

Only financial

contract that

provides

insurance against

longevity risk

Inflation-linked

option is low-

risk annuity –

hedge inflation

risk, longevity

What would be best advice?

The inflation linked annuity = minimum risk

• Guaranteed to receive annual pension increases at 100% of CPI inflation for life

• Mitigates consumption, investment, longevity risk

Therefore we recommend the inflation-linked annuity

BUT

It is expensive - many investors place emphasis on leaving bequest at the time of retirement

Annuity Options at Retirement

Annuity Type Longevity

Risk

Investment

Risk

Inflation Risk Capital to

Heirs

Fixed Income Yes No Yes No

Inflation

Linked

No No No No

With-Profit No Smoothed Depends on

Returns

No

Living

Annuity

Depends on

Income

Yes Depends on

Investor

Balance of

Capital

LifeStage

Annuity ™

Depends on

SORRI™

Probability

Limited Depends on

SORRI™

Probability

Balance of

Capital

A word on Living annuities...

• Are all Living annuities born equal?

• Some identified risks and trends: o Flexible draw rates – a good selling strategy and an even

better “Consume your assets” strategy.

o Inflation risk & Longevity risk

o You can leave the assets to your children – can you?

o If you have an unexpected financial need, you may

increase your

draw rate and reduce it the following year

Fees on products at retirement

Fixed Annuities •Advice/ structuring:

•Maximum 1.5% + VAT

•Ongoing Administration- Included in quote

Advice- None

Living Annuities/ Lifestage Annuity •Upfront

•Advice/ Structuring: Max 1.5% + VAT

•Administration

•Ongoing •Advice

• Administration

•Investment / Portfolio fees

Is there an alternative?

The Lifestage Annuity: combination of Living & Life

New approach

Combines strengths of living annuities and life annuities

Provides an advice framework

Uses delayed annuitisation to get cheaper life annuities as your life expectancy falls

The Alexander Forbes Lifestage Annuity™

Retirement age Annuitisation

60 74 75 73 ??

Life annuity – insurer 3

Life annuity – insurer 1 Living annuity

Regular checks

Life annuity – insurer 2

STEP 1- At retirement invest in a living annuity

STEP 2 - Financial advisor regularly checks assets against the income required

STEP 3 - Advisor advises when optimal point is reached

STEP 4 – Living annuitants have the OPTION to convert from a Living Annuity to life annuities

Pension options: The right advice…

The ability to “forecast” your pension

• Simulates results of annuity strategies and then provides optimal

solution

• The ability to map the chosen pension relative to income needs:

Key income measures – income for comfort and necessities

Used at time of purchase of pension, and on an ongoing

basis by financial planning consultants

Retirement planning: in summary

Retirement planning starts the very first day you start working

Make sure you understand your pension options

Include all your other investments outside of your company retirement fund

Please contact your accredited financial advisor to

discuss your retirement

We don’t want this!

RETIREMENT PLANNING – WHY THE NEED

FOR ADVICE?

Estate planning and drafting your last Will and

testament…

The purpose of Estate Planning

To ensure that the owner of the estate and his or her beneficiaries enjoy the uninterrupted benefits of the estate before and after death, no matter when death occurs.

Estate Planning objectives

•Efficient administration before and after death

•Uninterrupted enjoyment of assets by beneficiaries

•Ensure a valid will is in place

•Appointment of a known executor

•If there is a trust, appointment of suitable trustees

What happens if I die today?

All my assets (bank accounts, credit cards etc will be frozen)

How will my spouse and dependants survive without my income and ready cash?

1. Ensure you have a valid will and your family knows where it is kept

2. Ensure that your family has access to cash outside of your personal accounts

If I die without a valid will - Intestate

•Master of the Supreme Court appoint an executor

•Executors fees will be 3.5% plus VAT – non-negotiable

•Intestate Successions Act of 1987 used

Movable assets

Investments

Immovable property

Policies payable to the estate

Claims in favour of the estate

Wills deal with your distributable estate

The above assets will be distributed by the executor and

will attract executors fees

• Pension or retirement fund proceeds

• Provident fund proceeds

• Retirement annuities

• Group life cover

• Policies payable to beneficiaries

• Deferred compensation

The executor will not distribute the above assets. They will not

attract executors fees and cannot be included in your Will

Wills do not deal with the following

• Review your Will regularly

• Revoke all previous Wills each time you make changes

• Ensure it is legal and valid

• Draw up two copies with original signatures

• Store each copy in a safe place, eg safe custody

• Your financial adviser should have a copy

• Tell your family where it is held

Wills – some tips…

There are no magic wands

Thank you

Questions?

PRE RETIREMENT PRESENTATION FEB 2012€¦ · • Is not advice as contemplated in the Financial...

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