Dear Finweek Readers
Unfortunately my contribution to this article was severely edited.  This is the full unedited version of my advice to Mr & Mrs Jones, which will hopefully make more sense than the version included above:

Step
1: Get rid of short-term debt

As
their personal loan is attracting high interest, I would recommend that they
withdraw R100,000 from their investment portfolio to settle this as soon as
possible. It does not make sense to service high-interest debt when you have
savings available.  They must ensure that the money that was going towards
loan repayments is now put towards their savings each month.

Step
2: Plan to pay off the bond before retirement

Assuming
their house is in a good area and the reason for the drop in value is purely
driven by the current depressed property market, I would recommend that they
plan to have their bond settled by the time they retire.  To pay off a
bond of R2,5 million in 12 years, at an interest rate of 10% (prime plus 0,5%)
they will need to increase their monthly instalments to R30,000 per
month.  A home of your own provides the emotional and physical assurance
of a comfortable, secure retirement and therefore it is vital to have your bond
paid off by the time you retire.  Unfortunately with flexi-bonds it has
become so much easier to access the funds in your bond, but I would caution
against falling into the habit of doing this as you end up paying much more
interest over the term of your bond.

Step
3: Set up a monthly budget and keep track of expenses

In
my experience as a financial planner, developing a healthy relationship with
money and being in a position to create wealth, begins by having a monthly
budget and knowing where you spend your money. I provide a free online budget
planner on my website, http://www.blinkconsulting.co.za
.

With
both Mr and Mrs Jones having their own businesses, they could potentially be
claiming for a number of legitimate expenses “in the production of income” and
thereby reducing their taxable earnings.  A qualified tax adviser will be
able to advise them. They will need to keep an accurate record of their
expenses to be able to do this.

Step
4: Save for Retirement

A
fantastic way to save for retirement and reduce tax is to set up a Retirement
Annuity fund.  The Receiver of Revenue allows you to contribute and deduct
up to 15% of your non-retirement funding income.  As Mr and Mrs Jones are
not on a pension or provident fund, they should each be saving R9375 per month
in a Retirement Annuity.  This will save them tax of R3750 per month,
meaning that they are effectively only paying R5625.  They should each
have their own retirement fund so that they can maximise their tax free lump
sum at retirement (currently you can withdraw 1/3rd up to R315,000
tax free).  The growth within a retirement fund is tax free, and funds are
protected from creditors (an important consideration for business owners).

Step
5:  Put money into a Savings Account for tax and tuition

As
Mr and Mrs Jones are both self-employed, their full income is paid to them and
they are responsible for paying  the applicable tax to the Receiver when
they submit their Provisional Tax returns twice a year.  Many
self-employed people are in this position, and they need to be careful to make
adequate provision for tax to avoid running into cash-flow problems
later.  it is a very good idea for Mr and Mrs Jones to transfer their
calculated tax into a separate savings account, so that the funds are easily
accessible when taxes fall due.  Taking the tax saving on their Retirement
Annuities, they need to set aside R30,083 per month between the two of
them.  I would recommend that they use an interest-bearing account as they
will only be “parking” the money temporarily and it should therefore not be
exposed to market volatility.

They
are also in a predicament where they will need to come up with lump sums to pay
for their daughter’s university tuition.  Most universities require two
payments, one at the start of the year, and the next in May or June.  This
will mean bi-annual payments of around R18,000 each.  They need to put
money aside into a savings account each month for this, and other unplanned
expenses which are likely to come up during the year.  I would recommend
that they start by putting aside R5,000 per month, which will mean that they
have R60,000 a year for tuition, adhoc expenses and emergencies.

Once
their daughter has completed her studies they can continue to put this money
away, but adapt their investment with the longer term goal of retirement

Step
6: Get professional advice regarding their investment portfolio

After
using R100,000 to settle debt, the Jones’ have R2,7 million invested in bonds
and equities.  As they have 12 years to go until retirement, for the time
being they can still keep a large portion of their portfolio in equities. When
deciding which investment portfolios to select, they need to consider the long
term performance track record and ongoing fees charged by the investment
manager and financial advisor.  As the Jones’ are not investment
specialists, I would advise them to consider placing their accumulated savings
into a selection of Balanced Funds (also known as Managed Funds) which include
exposure to equities, bonds, property, cash instruments and offshore in their
fund.  Apart from stock-picking a Balanced Fund manager has a flexible
mandate that allows him to actively move funds between the various asset
classes to ensure that investors always have the most appropriate mix, thereby
reducing investment risk.  Depending on the fund, they require investors
to have an investment horizon of 3 to 8 years.  Popular balanced funds
include Stanlib Balanced, Allan Gray Balanced, Coronation Balanced Plus,
Investec Managed, Momentum Balanced, Prudential Balanced, and Foord Balanced.

I
would recommend that the Jones’ also put an additional R5,000 a month into this
investment portfolio, with the aim of boosting their retirement nest egg. 
As Retirement Annuity contributions have been maximised, I would recommend that
they place additional savings into a unit trust based investment, which will
also provide them with liquidity and access to capital at retirement (as
Retirement Annuities are designed to provide a regular monthly income).

Step
7: Consider ways to build real equity in your business

As
both Mr and Mrs Jones have their own businesses, managed correctly, they may be
able to sell these businesses at retirement. For instance, dental practices
often have expensive equipment, and a fully equipped practice in a good
location may be an attractive option for a young dentist starting out.  Mr
Jones could even identify a potential buyer now and enter into a Buy & Sell
Agreement which includes life and disability insurance to ensure that his
practice also realises a fair value should he pass away or become disabled
prior to retirement.  On the other hand, Mrs Jones could find ways to
build her brand and create long-term value in her business, such as creating a
franchise model where she can continue to earn royalties once she retires. To
build up a financial track record they should appoint an accountant to prepare
financials for their respective businesses, as this will be needed when
approaching business advisers and potential buyers.

In
Summary:

Joint
Monthly Income

R125
000

-         
Less Tax

-R30,083

-         
Less Bond Repayments

-R30,000

-         
Less Other Monthly Expenses

-
R35,000

-         
Less Retirement Annuities

-
R18,750

-         
Less Short-Term Savings

-
R5,000

-         
Less Unit Trust Savings

-
R5,000

Monthly
Surplus

R1,167

If
they follow these recommendations, according to my calculations, which assume
annual inflation of 6%, net investment growth before retirement of 10% a year
and 8% after retirement, and savings contributions increased by 8% per annum,
Mr and Mrs Jones will be able to retire in 12 years.  They will
have accumulated enough assets to provide them with an after tax income
equivalent to R35,000 per month for 20 years, increasing with inflation each
year.

Heather Robertson, Certified Financial Planner®

http://www.blinkconsulting.co.za

083-276-8709 (Mobile)

011-326-6448 (Office)