As time goes by, our financial goals evolve and change. When we’re young, most of us focus on specific goals that will help us to accumulate wealth. Then – as our golden years approach – we tend to shift our attention to wealth preservation and, ultimately, the successful transfer of capital to those we love. Read on to find out more about what to consider as times goes by.
Phase 1: Get going with SMART goals to accumulate wealth
As a new earner, a really good way to get the financial ball rolling is to focus on SMART goals. SMART goals are Specific, Measurable, Attainable, Relevant and very importantly, Time-based. This is not a new concept, but it is all-inclusive, and it works. Let’s explore SMART planning a little further.
- Make your goals SPECIFIC. Being specific means knowing what you want and being prepared to put a number on it. For instance, now that the budget speech has been and gone, we all know that our effective personal tax rates will increase and that this will affect our monthly budgets. Being specific means determining the exact amount of the increase and how it affects your investment plan.
- Ensure that your goals are MEASURABLE. Measure your goals in the same way a doctor would look at lab results. An example of this would be determining whether your RA contributions take full advantage of the SARS incentive which encourages you to put 27.5% of your annual income towards retirement.
- Set your goals so that they’re ATTAINABLE. Be truthful to yourself about how much capital you’ll need for retirement. This includes acknowledging that downsizing your house on retirement is not always that easy and that you can’t take the sale of your business for granted
- Set RELEVANT goals. Goals aren’t much use if they’re not relevant. Your ability to retire happy and healthy – both physically and financially – is the very definition of a relevant goal.
- Focus on TIME. This is the most important factor in the success of a wealth-accumulation plan, 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.
Phase 2: Preserving your worth
As time goes by, you’ll want to start thinking about preserving your wealth. This often requires a change in the underlying asset allocation of your investment portfolio, to ensure that you have sufficient low-risk assets to provide you with an income during your retirement. In practice, this could mean relying less on investments that include a high percentage of offshore and equity exposure in favour of something like the Kanan Wealth Stable Growth Fund.
Two rules of thumb can come in handy when understanding asset allocation for retirement:
The ‘four-percent rule’ states that if you withdraw 4% from your wealth portfolio annually (adjusted for inflation), your savings will last for 30 years – assuming an equal split between shares and bonds. This simple rule can add clarity in a seemingly complex investment world
The ‘110-minus-your-age rule’, asks that you simply subtract your age from 110 to get an indicator of the percentage of your total investment portfolio that should be invested in equity and property.
Remember to focus on the principles rather than the actual numbers and percentages when using these rules of thumb. They are only rules of thumb, so rather let your financial planner do the heavy maths.
Phase 3: Transferring wealth to those you love
As time goes by you’ll enter what can be the most rewarding phase of your financial life. It’s an opportunity to give to those you love that does involve preparing that ‘final file’ which should ideally include:
- A Last Will and Testament (which is updated whenever your circumstances change)
- A Living Will (to help your family make medical decisions when you no longer can)
- Powers of Attorneys (include a general one and a bank-specific one)
- The Title Deeds to your home
- Car registration documents
- A list of your assets to assist your Executor in winding up your estate
- A list of your life assurance policies to assist your dependents before your estate has been wound up
- A letter of wishes to guide the sharing of your precious possessions and memories
Once all of this is taken care of, you can get inspirational in your wealth transfer strategy. For instance, you and your spouse can donate up to R100,000 every year, tax-free. Why not use this opportunity to pay for your grandchildren’s education?
And time will go by
When our loved ones pass away, we like to wish each other a long life…But of course it’s how you choose to fill those years that’s even more important. When you’re young and ambitious, take advantage of your boundless energy to set yourself SMART and meaningful goals that will make a lasting difference to your financial wellbeing. Later on, show respect to your hard-earned savings by implementing savvy wealth preservation strategies. And as your twilight years beckon, make sure that all your ducks are in a row so that you can pass on your learnings and earnings to generations to come.
And remember – whatever stage of life you’re at – to sit down with your advisor at Kanan Wealth at least once a year, to make sure that everything is on track.