Ultima Financial Planners - News

 

Organisations around the world have been severely affected by the current dismal market and economic environment. As a result, many people now have to face the daunting possibility of being retrenched.

 

Retrenchment, whether forced or voluntary, can be one of the most unsettling experiences you’ll face in your life. Apart from the emotional issues, it raises various financial concerns you may not have had to worry about before. How to get by until you find another job, whether you should use your lump sum to pay off your debts and the best way to make your money last may be some of your main concerns. The time immediately after retrenchment demands sound financial management on your part and could be the most defining moment in determining your long-term financial well-being.

 

The natural response to retrenchment is generally one of shock and even anger, which will inevitably turn into feelings of uncertainty. This is normally when our ‘caveman’ instincts take over, we adopt an adapt or die attitude and our default mindset kicks into survival mode. But while in survival mode, there is little doubt that logical, sound long-term financial decisions begin to elude us.

 

While retrenchment is an anxious time, many people later say it was the kick-start they needed to start thinking seriously about financial independence. But where do you start?

 

Firstly, we need to protect ourselves from our ‘inner-caveman’. It is vital that we have a sound framework from which to make informed and logical decisions that take our future goals and immediate needs into account. You should therefore first evaluate your current position and determine what you have to work with and then plot your way forward in accordance with your needs.

 

Your current position is generally determined by your current liquid investments and the severance or retrenchment package paid to you. The following is basically what you can expect to receive upon retrenchment:

 

~         severance pay – this is usually at least one week’s remuneration for each completed and continued year of service. Note that the first  R30  000 will be tax free – a once in a lifetime SARS exemption.

~         outstanding leave – this is paid out as gross income

~         notice pay – this is usually four week’s remuneration (for more than 1 years service)

~         pro rata bonus  - this will depend on your employment contract

~         Unemployment Insurance Fund (UIF)  -  the UIF formulas are quite complex and depend on income brackets and period of service. This makes it very difficult to gauge exactly what one can expect. Needless to say, the general guideline is that you will receive around 40% of your final salary for about nine months. 

~         pension/provident fund - you can choose to transfer your retirement savings to a new employer fund at a later date or to a  preservation fund. You could also choose to withdraw the benefit and take the cash.

 

With the exception of your pension/provident fund, all of the above should be used to repay debt and assist you in paying your monthly expenses. When deciding on what to do with your pension/provident fund, you should be extremely mindful of the consequences of your decision. If you, like many people, are tempted to take the cash, you should remember that the amount will be severely eroded by taxation and the long-term consequences could be devastating.

 

For example, a 40 year old that has been contributing 10% of his/her pensionable salary for the last 10 years and is planning to retire at 60 will need to contribute at least three times more immediately after retrenchment just to recoup the loss of compounding interest. The longer you have been contributing and the closer you are to retirement, the more the factors work against you. This becomes an especially important consideration for those planning on cashing out to pay off their bonds.

 

Once you have a firm grasp on what your current financial situation is, you can turn your attention to how these fit your needs. Your needs should be realistic and carefully considered as you should strive to bring your monthly expenses as far down as possible. This is achieved in two key areas:

 

family budget

Sit down with your family (remember, you’re in this together) and draw up a comprehensive budget. This will enable all of you to negotiate around where you can cut down on expenses. There may be areas that are non-negotiable (e.g. security, medical aid, etc) and that is acceptable. The key is to get buy-in and commitment from everyone concerned.

 

debt

Once you have cut down as much as possible on voluntary expenses, your focus should turn to debt repayments. Interest on debt has a crippling effect on your monthly obligations and general financial well-being. The rule of thumb is that shorter-term debt generally has a higher interest rate (e.g. credit cards) and should therefore be tackled first. As far as possible, the lump sum(s) you receive should go towards paying this off.

 

The most appropriate approach to managing your finances depends entirely on your personal situation. Even if you are going straight into another job, the choices you make now will affect how you live in the future. This is particularly true for the way you choose to handle your retirement savings. It is therefore always a good idea to consult a Certified Financial Planner to help you devise a strategy that meets all of your requirements and future goals.

By Shaun Latter - acsis Financial Planning Coach

 

 

 

As financial planners, one aspect of our commitment to our clients, is to continually be on the lookout for possible scams and investment fraud. Ian De Lange from Seed Investments wrote the following article which we believe is crucial to trying to avoid investment scams.

This week South Africa was rocked with an investment scandal, that in terms of the purported sheer size of up to R15 billion, will dwarf any previous scams. While we know that despite tight regulations, there will always be scams looking for culprits, it is very important that investors assess counterparty risk before an investment is made.

In the alleged scam of Tannenbaum billions of rands were invested into a private operating company promising investors fantastic returns. It amazes how supposed smart investors apparently put in millions without a hint of due diligence.

I found this on the CFA (Chartered Financial Analyst) website, adapted slightly for local situation. There are no guarantees, but with investments it is vital that counterparty risk is reduced to as close to zero as possible.

10 tips on avoiding investment fraud – posted after the Bernie Madoff scheme came to light.

1. Understand clearly the investment strategy – “Some investment opportunities appear alluring simply because they are described in impressive, complicated terms. Investment strategies and financial products should be clear and understandable. The nature of the risks involved can vary widely and should be well understood. Even the venerable Peter Lynch advised people to invest only in what they understood – advice he abided by in his successful career. If you don’t understand it, stay away.

2. Match investment strategy to reported performance – One of the red flags in the Madoff affair is that reported performance was too consistently good. Other investment scams, popular on the internet, purport to use ultra-safe “prime bank” financial instruments from the world’s largest banks. E-mails that promise double-digit returns are incongruent with the safe investment strategies they purport to offer. Also, find out if the firm has its reported performance numbers independently audited, who audits them, and if possible whether these figures comply with Global Investment Performance Standards, a set of ethical principles for calculating and reporting investment results.

3. Watch for e-mail solicitations and Internet fraud – The internet is a low-cost way for scammers to reach millions of people. Unsolicited e-mail messages offering you investment opportunities that sound too good to be true probably are. Online bulletin boards and electronic investment newsletters are also fertile ground to disseminate false information on thinly traded stocks for a pump-and-dump scheme. Treat information from unknown sources on the internet with great suspicion.

4. Be wary of “sure things,” quick returns, and special access – Legitimate investment professionals do not promise sure bets. Legitimate get-rich-quick schemes simply do not exist. Scammers often make the implausible combination of safety and high returns seem plausible by granting you “special access” based on your relationship with a mutual acquaintance or affiliation with a specific religion or ethnic group. Also, understand clearly the terms by which you can redeem shares or exit the investment. When can it be done and what are the fees? Ponzi schemes become unsustainable when investors pull out their money.

5. Understand what, if any, regulatory oversight exists – Fraud may be less prevalent in regulated settings, like mutual funds. Hedge funds are less regulated than mutual funds and the risks must be carefully analysed.

6. Assess the operational risk and infrastructure – Any investment management operation should have a physical infrastructure for trading and administration. Ask to see them and inquire about the firm’s processes and controls. It is important that a firm have separate, independent operations for asset management, trading, and custody to provide checks and balances against fraud.

7. Ask about independent audits and who performs them. An auditor should be independent, reputable, and congruent with the size and scope of the investment operation.

8. Assess the personnel – Ultimately, the reliability of any operation is predicated on the integrity and competence of its people. So find out who makes investment decisions and who implements the investment strategy. They should be separate people with relevant experience, education, and training. Credible investment professionals speak knowledgably and comfortably about their professional standards.

9. Perform a background check. If an advisor firm or investment manager is not listed with the FSB (www.fsb.co.za), find out why. If they are, make sure their record is clear.

10. Limit your exposure – One of the surest ways to avoid the catastrophe associated with investment fraud is to limit the amount you invest. Diversification is one of the most fundamental and enduring investment principles. Investors often expose themselves to unnecessary risks by concentrating their funds in one or two securities. By limiting your exposure to five to 10 percent of your assets, the principle of diversification can protect you if an investment turns out to be fraudulent.

Although these points cannot guarantee that you will avoid investment fraud, they will increase the likelihood that you will make smart choices.