Aligning Your “Wheel of Life” – A Beginner’s Guide

As your wheel of life turns, your financial needs, goals and focuses change. When you start working, you’re absorbed by accumulating assets. Later, as you near retirement, your focus shifts to wealth preservation. And eventually, when you’re settled and comfortable in your golden years, the transfer of wealth becomes your number one priority.

It goes without saying that each of these stages requires its own wealth management strategy.

Getting the ball rolling

A really good way to get the ball rolling in your early 30s is to focus on time-based goals as an investment strategy. You’ll need to review and modify these goals annually, until you’ve earned your freedom to retire. To be effective, time-based investment goals must be:

• Accurate: There’s no space for vague thinking here. Be precise about how much you’ll need for your children’s education in 5 years’ time, for example.
• Quantifiable: See your financial advisor (that’s us!) at least once a year to check whether you’re on track to have enough capital for retirement.
• Shared: Get buy-in from your family about what’s important at each stage of life, including events like annual family holidays and the need to pay off debt.
• Honest: Be truthful to yourself about the amount of capital you need for retirement. If you resign from your job and are required to move your pension funds into a preservation fund or retirement annuity, remind yourself that the funds are meant for retirement only and don’t be tempted to make a partial withdrawal.

But most importantly, they must be time-based

This is the most important factor in the ultimate success of your wealth accumulation strategy as the asset allocation of your funds for each goal needs to be based on the amount of ‘time in the market’ required to achieve the goal. We recommend allocating:

• Short-term goal funds to non-volatile assets such as money market unit trusts.
• Retirement funds to a balanced portfolio with growth opportunities, including equity.
• Funds which you’d like to transfer to the next generation to investments which assume a higher level of risk, such as those with offshore equity exposure.

Protecting your worth

Once you’ve gained financial freedom and are able to retire, you need to embrace a wealth preservation strategy to ensure that your wealth doesn’t just last throughout your retirement, but is also sufficient to provide you with meaningful joy and good health.

Wealth preservation strategies usually entail changing the overall asset allocation of your portfolio so that you’re not overly exposed to risk or volatility. As a rule of thumb, you need to preserve the proportion of your portfolio that’s meant to provide you with an income for at least 25 years in retirement.

Transferring wealth

This can be the most rewarding phase of your financial wheel of life as it’s your chance to pass on a legacy to your heirs. First things first, ensure that you have the fundamental legal documents in place, including:

• A Last Will and Testament
• A Living Will
• Powers of attorney (general and bank-specific)

Once you’ve got your ducks in a row, you can get creative in your wealth transfer strategy. During your lifetime, why not use your (and your spouse’s) R100,000 annual donations allowance to establish tax-free savings accounts and retirement annuities in your children’s names?

Another way to get creative is to establish a testamentary trust in your Will which acts as a ‘Family Bank’. The beneficiaries can make applications for funds to the trustee (who will vet the applications as a bank would) to cover expenses such as grandchildren’s education, deposits for first-time homes and loans for sound new business ventures.

The big wheel keeps on turning

Wherever you find yourself on the wheel of life, try to remind yourself to live in the moment and enjoy what you have. This is a lot easier if you have a sound financial plan in place – please speak to us if you have absolutely any questions about your situation.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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