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Retirement Planning
Wednesday, July 15, 2015 - 02:16
Poor suffering

In the next decade, the number of ultra-rich South Africans in Johannesburg and Cape Town is expected to increase by about 40%. Yet the percentage of this group that will maintain their lifestyles into retirement is significantly smaller.

According to Jason Garner, Strategic Relationship Manager for Private Wealth Management - a division of Old Mutual Wealth, while the growth in the number of high and ultra-high net worth figures is encouraging and good news for the country, it also raises the issue of more awareness needing to be created to understand the real value of capital required for wealth preservation, especially during retirement.
“Many high net worth individuals incorrectly think they have more than sufficient funds for retirement due to their current status, but often this may not be sustainable for the particular lifestyle that the individual has become accustomed to,” he says.
According to the 2014 Old Mutual Wealth Report’s Attitudes Survey, more than a third of the financial planners surveyed expected their super wealthy clients to spend more on luxury goods this year, with 46% of ultra-rich African clients mentioning they would increase their spending activities.
“Many high net worth individuals become accustomed to a certain type of lifestyle and as a result they need to ensure they have the funds available if they want to maintain this lifestyle well into retirement, which is likely to include overseas travel and the purchasing of luxury items and experiences. Similar to your average income individual who doesn’t have a savings goal, a comfortable retirement is unlikely even for the wealthy, when they do not have a long-term wealth preservation strategy.”
One only has to look at the reality of spending patterns, says Garner. “No matter what the age of the individual or even income, people consistently spend more money as they earn more. Many seem to think that with R30 million in savings, they can continue to live the lifestyle to which they have become accustomed. The single biggest mistake with this thinking is that many do not understand the long-term consequences of sustainability of their chosen lifestyle at retirement. It is not enough to focus on single goals as many respondents did. One must look at the demands that all the lifestyle requirements, including unforeseen costs, will have on the wealth management strategy holistically.
“Retirees also need to remember that their day now includes an extra eight to 10 ‘free’ hours that were previously spent at work, and it is likely that this time will be spent doing more expensive activities that need to be budgeted for.
“The longer we live and the better medicine becomes at keeping us alive, the greater the cost of our healthcare needs. The longer we live, the more likely it is that, in addition to our healthcare costs, we will need some kind of long-term care or frail care when we become incapable of living independently.”
Garner explains that upon retiring with a significant amount of money, there are two potential pools that this money should be divided into, namely wealth preservation assets and surplus assets.
“Wealth preservation assets refer to the capital that is needed to sustain the level of wealth or lifestyle for the duration of retirement. Once this figure has been determined, the amount of surplus capital available is known.
“Surplus assets refer to the money that individuals could effectively ‘afford’ to lose. This money can be used when making emotional financial decisions or to speculate with, such as buying into a new business venture that may or may not be profitable.”
Garner adds that a very clear line needs to be drawn between the two types of assets and that one must never allow the emotional impact of what happened in the one to affect the other.
“One needs to devise an integrated strategy, which includes both wealth preservation assets and surplus assets, and investors need to understand how much is needed out of each pool and what can or can’t be done to ensure a comfortable retirement.”

Copyright © Insurance Times and Investments® Vol:28.7 1st July, 2015
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