We live and operate in South Africa where entrepreneurs are needed and should be encouraged as well as nurtured. However, many entrepreneurs neglect one area of their financial life, and that is retirement planning.
Diversifying
Many business owners build an enterprise that is effectively an extension of themselves. So, if s/he were to stop working in the business, their income would no longer exist. The success of the business is effectively both a strength and a weakness for the entrepreneur, and thus sole reliance on this entity to provide retirement capital is unwise. The need to diversify financially, away from the business, should be considered in order to ensure that, when retirement arrives, confidence in receiving long-term income is not entirely placed on the business.
Make the planning part of the entrepreneurial journey
Retirement planning is simply another journey where the destination date would be the date when you actually retire. Taking note of all of the above, my suggested course of action would be:
1. Work with a trusted financial planner who will assist you to determine your unique needs and create a plan of action to meet these needs.
2. Once this plan has been formulated, the next stage would be to take suitable action to select a diversified choice of investments that will provide adequately for your retirement.
3. Your choice of available investment products at this time are:
a. Retirement annuities
b. Endowments
c. Unit trusts, also known as ‘collective’ investments
d. Employee benefit funds, which are dependent upon the size of the business and its staff
4. Get rid of debt. Systematically, over time, reduce all debt, including bonds over your home, credit cards and the like, by increasing regular repayments.
5. Create an eventuality fund separate from your business in order to cater for the unforeseen events that can affect us all.
6. Be focused on your end goal – a comfortable, debt-free retirement.
7. Continue to revisit your retirement plan at least annually, and be flexible.
8. Understand the power of compounding returns (said by Einstein to be the ‘eighth wonder of the modern world’).
Product explanation
(a) Retirement annuities are simply personal pension plans. In terms of the South African tax law, tax payers are incentivised to contribute to retirement products up to 27.5% of their gross income. Dependent upon contributions, the choices from product providers are vast, and can generally be structured to provide multiple investment portfolios. The value within a retirement annuity may only be utilised by the investor, providing financial protection (Insolvency Act).
(b) Endowments are structured products where there is a specific investment term, from a minimum of five years. The contribution or premiums are made by means of after-tax funds, and the maturity value is tax neutral in the hands of the investor. During the period of the investment, tax is paid on behalf of the investor.
(c) Unit trust investments are widely used today, and are probably the most flexible investment structure available. Very simply, a unit trust is a collective investment where the fund is managed according to a predetermined mandate. There are hundreds of unit trusts available to the South African investor.
(d) Employee benefit funds are pension and provident funds. Where a retirement annuity is an actual individual fund, a pension or provident fund is created by the business when there are sufficient staff numbers. Additional benefits can be added such as life, disability or funeral cover.
No one size fits all
In conclusion, there is no ‘one-size-fits-all’ package. The role of financial planners in preparing their clients for a comfortable and stress-free retirement is to provide a financial planning structure unique to every individual and assist the client in achieving his/her goal.