Winter is coming

Having been promised in May 2016 that South Africans will never again experience load shedding, many of us were caught off-guard when rolling blackouts struck last month. Escalating from stage 1 to stage 4 at lightning speed caught us equally unaware as we dusted off gas cylinders, scratched around for matches and charged our head torches. But, in the context of state capture and with the benefit of hindsight, the re-emergence of load shedding was inevitable and perhaps we shouldn’t have been so quick to pack away those cylinders. With winter just around the corner, we need to be prepared for more black outs and uncertainty around the country’s energy grid. Similarly, when planning our financial futures, we need to prepare accordingly for life’s ‘blackouts’ – factors beyond our control and unforeseeable events that can bring us to our knees if not carefully planned for. Although it is impossible to plan for every curve ball, these five eventualities are worth planning for:

1. Retrenchment

A tough economic climate such as ours, coupled with disruption in significant industries such as banking, media and hospitality, increases the likelihood of companies right-sizing and retrenching staff. In terms of retrenchment insurance, there are very limited options available in the market place. A few large insurance companies in South Africa provide retrenchment cover for between R3 000 and R30 000 per month for a period of 6 months, although underwriting and costs may be prohibitive. To fortify your financial position against retrenchment, our advice is as follows:

• Reduce debt: While employed and earning a regular income, prioritise debt reduction and ultimate elimination. In the event of unemployment, servicing debt will be difficult and could result in major financial and legal turmoil.
• Build up cash reserves: Once you have settled your debt, be ruthless with your budget and use any surplus cash to build up some reserves. Even a slight increase in your bond repayments will provide some cushioning in your access bond. A money market account or dedicated savings account are also suitable savings vehicles for cash reserves.
• Preserve capital: Upon retrenchment, the temptation to withdraw your accumulated retirement capital will undoubtedly be strong. However, if you have taken steps to build up cash reserves, reliance on your retirement capital will be diminished. If possible, protect your retirement capital by moving it into a preservation fund so that it can continue to achieve returns that outstrip inflation.
• Know your rights: At the outset of retrenchment discussions and negotiations, we strongly recommend that you seek legal advice so that you are equipped with a firm understanding of your rights. It is far easier to negotiate upfront from a position of knowledge than to fight the matter after-the-fact at the CCMA.
• Seek financial advice: Once you have a clear understanding of the value of your retrenchment package, seek the advice of a financial adviser. Important matters that you will need to make decisions on include medical aid, gap cover, replacing any lost group risk cover and possible continuation options, preserving your retirement capital and re-working your budget.

2. Large unforeseeable expenses

Although we may not know the nature of large unforeseeable expenses, we can be certain that they will happen at some stage in the future. Whether it is a sick pet, burst geyser or serious illness or injury, large expenses can set us back financially and, if not planned for, sink us into debt. Building an emergency fund is a financial planning fundamental, but there are other steps you can take to prepare yourself for a ‘rainy day’:

• Short-term insurance: Update your short-term home and building insurance regularly and make sure you know exactly what you are covered for. In the event of a possible household or building expense, check the terms of your policy with your broker to determine whether you have a potential claim. Take steps to ensure that future claims will be paid by notifying your insurer of any purchases, renovations or changes to your situation.
• Pet insurance: Understand the terms of your pet insurance so as to receive the most from this benefit. Veterinary expenses can escalate quickly in the event of an ill or injured pet, so our advice is to understand exactly what you are paying for so you can claim accordingly.
• Gap cover: A gap cover policy funds the difference between what is charged by a service provider (e.g. anaesthetist) in hospital and what is paid by the medical aid. Depending on the policy, your gap cover insurer can pay up to 400% of medical aid rates.
• Tax: As laborious as it may be, ensure that your tax returns are completed timeously and accurately so that you are not faced with any unpleasant surprises from SARS.
• Rewards programmes: Last-minute travel bookings can be expensive, and in the event of emergency, we very often forget about the benefits available to us through our loyalty and rewards programmes. Take time now to understand the rewards programmes that you belong to so that, when the time comes, you can take full advantage of their discounts and travel benefits.

3. Incapacity

Another cornerstone of financial planning is income protection. While you are accumulating your wealth and working towards financial freedom, protecting your income against the possibility of disability or incapacity is essential. However, incapacity can take many forms and there are a number of other financial planning tools that may need to be considered:

• Severe illness cover: Severe illness cover, sometimes also referred to as dread disease or critical illness cover, is lump sum insurance that pays out on the diagnosis of a serious illness such as cancer or heart disease. Severe illness cover changes from insurer to insurer, so it is essential to read the small print to determine exactly which illnesses are covered and how severe they need to be in order for it to pay out. Although not generally considered an essential benefit, it can provide much-needed financial assistance in the event of major illness.
• Business overheads protection: If you run your own business, it may be worth exploring business overheads protection which provides insurance in the event that you or a key person in your business cannot work.
• Key person assurance: Similarly, if your business employs a key person that is integral to the running of the business, the company can buy insurance on that person’s life. In the sudden loss of a key person’s life, the insurance payout will buy the company time to find a new person or to implement strategies to save the business.

4. Divorce

No one enters into marriage expecting divorce and, at the time of marriage, it is difficult to contemplate a future separation. However, divorce is a reality for many couples and there are safety measures you can put in place to ensure that if it ever happens, there is an in-built level of financial preparedness. In the USA and Australia, divorcing couples are encouraged to consult a financial planner before getting divorced, although no such process happens in this country. Having a financial planner at your side throughout the divorce process to look after your financial interests is most definitely first prize. An independent financial adviser with no vested interest in the divorce can prepare long-term scenarios for you based on the proposed divorce settlement so that you fully understand the proposal before agreeing to it. In addition, a qualified adviser can assist with the payout of pension fund benefits – a very intricate area of retirement legislation. According to Sanlam Employee Benefits, up to 60% of divorce orders received by retirement funds cannot be enforced because the wording is incorrect. To safeguard your financial future, we recommend the following:

• Remain an active and involved partner in the household’s finances from the outset of the marriage. Insist on full transparency and open communication with your partner at all times. Be disciplined about keeping all financial records and paper trails.
• Know exactly what you and your partner own and owe, including properties, business interests, investments, trusts and offshore assets, and update your list of assets and liabilities at least once per year.
• Ensure that you have at least one bank account in your own name and that, if necessary, you can provide a good credit record. If you are divorced and have no accounts or credit record to your name, you may struggle to open accounts in the absence of a credit history.
• Be cautious of handing control over to one person in the partnership. For example, even having your cell phone contract in your partner’s name can cause problems in the event of divorce, bearing in mind that you will have no power over the payment of the account, account cancellation or phone upgrade.
• Think twice before completely giving up your career and becoming financially dependent on your partner. Consider reduced working hours, working from home, contract work or options for earning a passive income as alternatives.

5. Speculating

Taking unnecessary financial risk on so-called ‘investments’ that fall outside sound investment fundamentals is considered speculation. High-risk schemes or ventures are akin to gambling and – as with gambling – can lead to financial ruin. Fear and agreed often lead people to stake everything they have on one ship that they hope will someday come in. Putting money into a start-up business, signing up for a pyramid scheme or investing in ‘the next big thing’ are examples of high-risk gambles that provide no surefire strategy for building sustainable wealth. To avoid falling into the trap of speculating, consider the following:

• All that glitters is not gold. If a scheme, start-up or investment sounds to good to be true, it probably is. Be highly skeptical of any investment or scheme that guarantees impossibly high returns with little or no financial risk. Avoid any scheme that encourages you to invest as a matter of urgency for fear of missing out.
• Do your homework online and find a fee-based financial adviser who is completely independent. If you have retained your adviser on the basis of a professional fee, he should be able to provide you with an independent opinion on any investment at no additional cost.
• No investment return is ever guaranteed, so be cautious of any scheme or investment that offers ‘guaranteed returns’.
• The business model should be easy-to-understand. If you have trouble understanding the business plan, business model or fee structure, walk away.

This winter, back-up plans in the event of our energy grid failing include gas, candles, torches, generators, uninterrupted power supplies, inverters and solar panels. What are your plans for a ‘financial blackout’ such as retrenchment, disability, divorce or large unforeseen expense? Set aside time now to refill the gas cylinders, charge up the torches and install those UPS systems because winter is coming.

Have a great day.

Sue