Inheriting Money – What now? 

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During the Covid pandemic there was a dramatic spike in mortalities. Unfortunately it was the elderly that got hit the hardest. The effect was that there was a big shift of wealth moving from one generation to the next. As the winding up of estates come to a close the beneficiaries will suddenly have access to large amounts of money. Money that they didn’t plan to get nor worked for. 

It is very important that a proper plan be put in place to address this influx of cash. As the adage goes – “…easy come, easy goes…”. The statistics about broke Lottery winners should be a big warning to the beneficiaries.

Inheriting money can be a great way to jumpstart your financial future. It can provide you with the funds to invest in investment vehicles likes shares/stocks and bonds, purchase a home, or start a business. However, it is important to protect your inheritance so that it can continue to benefit you for years to come. 

This is where the planning part comes in. We all immediately start daydreaming about all the cool stuff we’ll buy – effectively wasting the money. However with good financial planning you can keep the capital and use the proceeds/income of the investments to spend on the things you wish to spoil yourself. 

To achieve this you need to get the most important first step right – get an independent, professional financial planner like a Certified Financial Planner® to help you with the plan. Why? The answer is easy.

It’s not their money. It’s yours. You unfortunately make all of your decisions emotionally! 

By not being able to see the big picture you get overcome by emotions and all the bad decisions take the lead like acting hastily, large focus on instant gratification, high level decision making (vs technical details) etc. 

This is also the reason why lotsof financial planners don’t really have great portfolios themselves – when it comes to their own money they also fall into the trap of making decisions emotionally (which usually leads to bad outcomes)!

By having someone else take the lead and guide you with facts and technical skills, you will be assisted so that your emotions don’t get the best of you. The goal of the inheritance is to keep the money! The uber rich families have figured out the trick that if you maintain and grow the inheritance then you can have multi-generational wealth. This is however not easy to achieve without a proper plan and external guidance from the professionals. 

Of course being wealthy can have many benefits for your children and even great-great-great grandchildren, such as financial security, access to resources, and the ability to make a difference in the world. Just think about the future financial security for your family. 

With all that wealth you can make a difference in the world. With a large amount of money, you can donate to charities or causes that are important to you. You can also use your wealth to help others by investing in businesses or providing scholarships for students who may not otherwise be able to afford tertiary education. 

Another way to protect your inheritance is to set up a trust fund or other legal entity. This will help ensure that the money is protected from creditors and other potential risks. You should consult with an attorney or financial advisor to determine which type of trust fund or legal entity is best for your situation. 

Finally, it is important to be aware of any taxes or fees associated with inheriting money. Depending on the amount of money you inherit, you may be required to pay taxes on it. It is important to consult with a tax professional or accountant to ensure that you are in compliance with all applicable laws and regulations. 

Losing a loved one is heart-breaking. Make them proud and get a financial plan in place to avoid losing all the money that they created during their lifetime. 

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Digital Assets – should I really consider investing in them?

The human race has come a very long way. On our journey there has been constant development and evolution. The reason we are the superior species on the planet is because we can adapt to change and continually evolve over the years.

Our economical foundation has also developed and evolved over the last couple of thousand years. Initially we bartered with each other exchanging shells, precious rocks and utility items like food and water. This later adapted to what we now call “money”. The coins and paper we are all familiar with. Fast forward to today and the vast majority of what we currently call money is really just digital registers of your bank balance. It is important to note that this registry of how much money you have is held with a centralized institution (like a bank), who is operating within the governing structures of the country within they operate.

Economists and investment professionals have dedicated their lives to ascertain what the best combination of traditional assets (equity, bonds, property and cash) needs to be, to deliver a specific outcome over a specific time period. We have lots of historical data to back test theories and investment management as a specialized field of study has grown dramatically.

But there is a paradigm shift happening right under our feet. You need to be acutely aware of the changing environment. Digital assets or crypto currencies have entered the arena. Initially they were dismissed as a fad or a phase and mostly ignored by the investment professionals.

However, adoption is happening around the world. We are still figuring out how it will be incorporated into our daily lives. Store-of-value, medium-of-exchange or one of the millions of other utilities DeFi offer can be argued as potential use cases. The jury is still out on how we will ultimately use crypto in our daily lives. But the media attention, adoption and very importantly, the big money, is increasing exponentially.

Governments and most big corporates around the world are having heated boardroom discussions on the impact crypto will have on their current business model. The clever ones are engaging and integrating. The dinosaurs are ignoring and dismissing it. Don’t be a dinosaur. You know what happened to them.

My focus and goal will be to help people with educational material and to assist them in engaging with this new world. Crypto will not take over the world tomorrow and as such there will be a gradual transition from the Traditional Finance (TradFi) to Decentralized Finance (DeFi). We’ll most likely have a combination of the two for many years as well.

I’ll be your Sherpa on your journey. I’ll lead the way. Highlight the path you need to stay on and show the pitfalls and dangers on the journey.

Welcome. And thank you.

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Why Retirement Annuities (RAs) should still play a key part in your investment portfolio

Lately I’ve seen numerous articles, had discussions with clients and came across various tweet storms where the humble RA has been slaughtered. The main arguments against them are : high fees, poor investment performance, inflexibility and regulatory restrictions.

I wanted to do an in-depth analysis of the value of the RA in a bigger investment portfolio, but it would be a futile exercise. There are just too many variables that could be easily manipulated to show a good or a bad scenario. Instead I’m going to focus on the bigger picture and the “why” at the end.

Before I start I need to put following into context. Unfortunately to this day, the vast majority of RAs are built on a legacy financial structure, with a legacy financial provider. This was an inefficient way of doing things and this led to a very high fee structure. Excessively high fees are unacceptable and by just looking at the EAC of the investment you will immediately be able to see where you stand. Your total EAC should be around 2% or less. Anything more is an indication that it is time to move those assets via a section 14 transfer to a more efficient provider.

The next important area is the performance of the funds you are invested into. You cannot achieve extraordinary returns will minimal volatility. Low risk funds = low returns. High risk funds = a chance of higher returns. Don’t confuse the two. But if your mandate is a higher allocation to risky assets then you would expect a higher return over the long term. Hence the performance may struggle over a year but over a 5 year period there should be superior returns.

There has been a big uptake in passive investing lately. Your return will then more closely be to what the market returns. If we factor into consideration that all investment managers have good and bad days, over the very long term going into a passive solution (index) is by far the smarter choice. Remember it comes at a fraction of the fee of an active solution.

Personally, I invest in the Sygnia Retirement Annuity fund and utilize the Sygnia Skeleton Balanced 70 fund. My internal rate of return (my actual return) for years have been floating around 12% and my total cost is 0.4% (which is already deducted from the 12%).

There is no reason why you can’t achieve a ~10% per year compound return on your RA. This now brings me to the actual reason why I still love RAs… the tax! The return above quoted is after tax because there is no tax in the fund. Plus your contributions to a max of R350,000 per annum is fully tax deductible. So you are able to put money into an investment and immediately receive a guaranteed return, pay no tax on your proceeds, have it locked away so you don’t make foolish decisions. This is not restrictive, but rather sound financial planning.

Yes, we know that tax will be due again later when you withdraw but by deferring your tax liability till when you have funds to pay it makes sense. In the interim if you generate 10% per year over a 40 year period you will have more than enough money to settle any amount of tax.

The tax refund that you get annually for SARS can also be used to fund other investments or your lifestyle. I’m happy to fight anyone on why an RA should form part of your portfolio – note however that there are various other assets that you should also include in your bigger portfolio. Happy to hear your feedback!

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