Bring the Tequila

-By Elke Zeki

 

A few years ago, when my sister got retrenched, her best friend dropped off a bottle of tequila and a hug. Short term comforts for a very real problem. Four years later, that same bottle of tequila made its way back to my sisters’ best friend when she suffered the same fate.  Retrenchment happens, and as South Africa moves into 2019 it is becoming increasingly common.

Years of corruption and mismanagement have left our economy in turmoil.  In newspapers we read about low GDP growth and ratings downgrades; fluffy concepts that speak more to those in the market itself, than the ordinary man.  However, there is nothing fluffy about a stagnant economy and the impact that has on a person’s daily living and livelihood.  It’s not uncommon for companies to close down or retrench during times like these.  And the reality is that the bottle of tequila may still make its way to many other friends.

Life will always be uncertain and at some point, you will undoubtedly face hardship. Yet some people manage to deal with adversity much better than others. Some people manage to transform that adversity into success. In talking to clients and people, I have been struck by recurring themes within their stories that have helped them overcome adversity.  And I would like to share those valuable insights with you.

 

It’s okay

Most retrenched people share the same emotional scars.  A feeling of inadequacy.  A feeling of loss.  Lacking self-belief or self-confidence.  Feeling vulnerable.

World famous vulnerability and trust expert Brené Brown says, “While vulnerability is the birthplace of many of the fulfilling experiences we long for — love, belonging, joy, creativity, and trust, to name a few — the process of regaining our emotional footing in the midst of struggle is where our courage is tested, and our values are forged.  Rising strong after a fall is how we cultivate wholeheartedness in our lives; it’s the process that teaches us the most about who we are.”

How do you do that? How do you regain your emotional footing to rise strong and wholehearted? How do you overcome your emotional scarring? You acknowledge your emotions.  Acknowledge how you feel and why you feel that way.

Know that its okay to have these emotions.  Working through the discomfort is what Brené refers to as “the rumble”.  She says, “Rumbling with these topics and moving from our first responses to deep understanding of our thoughts, feelings and behaviours gives birth to key learnings about who we are and how we engage with others.  The rumble is where wholeheartedness is cultivated, and change begins.”

 

It’s not personal

Companies retrenching and restructuring are not unfamiliar in times like these.  In most cases it’s not a reflection of your abilities or the value you add.  Don’t take it personally!

If you realise this, you will be more confident and energised when searching for new opportunities.

 

Don’t procrastinate

Rising through retrenchment gives you an opportunity to reflect and learn. It is a time where you can reconsider what is important to you and what your strengths are.    This can certainly help you to focus on the opportunities that best suit your skill set.  Start this process immediately as it takes time and consciously needs to be engaged with.

Procrastination can lead to months of indecisiveness, lack of motivation, low energy and can put you under tremendous financial pressure.

Author of The Passion Paradox, Brad Stulberg says, “Resilience is not about bouncing back.  It’s about moving forward.”

Having a plan and acting daily may not always be easy but it ensures you keep you moving forward and build momentum.

 

Compromise

Sometimes you need to compromise to move forward.  Some of the success stories I heard started with accepting a job below the level they were initially looking for.  However, the new job offered a foot in the door or better opportunities in the future.

You need to ask yourself what your values are.  What is most important and what are you willing to sacrifice?  Maybe you get the best job but it means spending 2 hours in traffic each day.  Are you willing to compromise on this?

Once you know what you will or will not compromise, you can open yourself up to various opportunities.  Even things you never dreamt of or were too afraid to do in the past, like starting your own business or consulting.

 

Support

Firstly, use your network to look for new opportunities.  This is critical and often where the best opportunities come from.

Secondly, lean on close friends and family who offer their unconditional love and support – and perhaps a shot of tequila.

And finally, be kind to yourself and don’t give up.

 

Here are a few great reads for those interested.

Articles talks:

The New Yorker – The art of decision making

World Economic Forum – Doctors in Scotland can now prescribe nature

Medium – Resilience is not about bouncing back, it’s about moving forward

TED Talk – Brené Bown on vulnerability

 

Books:

Brené Brown – Rising Strong

Adam Kay – This is going to hurt

Don Miguel Ruiz – Four agreements

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

The art of budgeting

-By Thiart van der Merwe

 

When it comes to money there are only certain things you can control. One of which is how much money you spend. Whether you earn a big salary or count your pennies you can control the amount of money flowing out your wallet.

Controlling your expenditure successfully always starts with the dreaded B word: budgeting. No one likes the admin of checking their bank statements or facing the black and white truth of just how much they spend on certain things.   But it is probably one of the most important parts of the financial process you have to take control of.

The budgeting approach we use is called the 3 Buckets. It’s a simple process where we break your expenses down into three buckets: Needs, Wants & Wishes. Your Needs bucket will contain expenses such as your bond, life insurance and food. Wants will be the luxury items such as DSTV, Netflix, Fibre, domestic workers etc. and Wishes will be the once-off holidays, hobbies and home renovations.

Anybody can use this approach.  It is best to use actual bank statements covering a period of 3 months or more.  Then break your spending down into an excel sheet or table. When you know how much you spend in each bucket you can start to adjust your expenses and rein in your spending habits if necessary. This is the single biggest tool you have at your disposal.

 

 

Our Budget Template can be found here.

This approach is especially useful for people who live off a fixed amount of monthly money, like retirees. The graphs below illustrate two different retirement strategies. In the first one, the monthly income drawn from the assets stayed the same and adjusted upward by inflation each year.  As you can see, the person ran out of money within 20 years.  In the second strategy, the draw down was more flexible and could be adjusted in periods of low growth. This meant less money for wants and wishes in certain years, but the long-term effect was that the money lasted the person’s lifetime. Being flexible with the amount of money you need could be the one thing that ensures your money lasts your lifetime.

 

Source: PortfolioMetrix

 

Many people think that saving money means they need to adjust their lifestyle drastically. We strongly believe that if you do this budgeting exercise you will be able to figure out an amount you can save without compromising lifestyle expenses, such as needs or wants. If you don’t save any money the best approach would be to start small and get used to the concept of saving. Once you build up a savings account you will be able to pay for various expenses in the wishes bucket from this account, rather than using your credit card.

True financial freedom means that you can stop working tomorrow and that you have enough assets – whether in investments, retirement policies or properties – to provide you with an income for the rest of your life. We typically believe that our salaries are the drivers of financial freedom. However, if you don’t save a portion of your salary today, you will need to work for that salary as long as you need money. So, in fact, it is your financial budgeting and savings that truly buys you financial freedom.

We strongly believe in creating Wealth for Life. But, to do the things you want to do during your lifetime you need to have the capacity to do so. Therefore, we believe you need to control your needs and wants and save the rest in order to truly tick the wishes off your bucket list.

As Joe Biden once said: “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” Make sure your budget reflects the things that make you happy.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

Financial considerations at retrenchment

-By Michelle le Roux

 

Retrenchment is an unfortunate event that can cause a lot of uncertainty and anxiety.  With it come many financial and retirement implications.   This section offers some guidelines to help you navigate some of the decisions you or someone else may need to make.

 

What happens to my pension fund?

If you belong to a company pension or provident fund, the rules of that fund will determine your access to your retirement capital on resignation or retrenchment.

The rules of thumb for a pension fund are:

  • It can be transferred in full to a preservation fund (at any service provider of your choice). There is no tax consequence for this.
  • You can take a partial withdrawal from the fund (taxable), and the balance will the transferred to a preservation fund (at any service provider of your choice).
  • You can decide to transfer the pension fund to your new employer’s pension fund.

The rules of thumb for a provident fund are:

  • It can be transferred in full to a preservation fund (at any service provider of your choice). There is no tax consequence for this.
  • You can take a full or partial withdrawal from the fund (taxable), and the balance will the transferred to a preservation fund (at any service provider of your choice).

 

Preservation funds are vehicles used to preserve the capital that you have already saved towards your retirement.

The cons:

You are not able to make further contributions.

The pros:

You may make one withdrawal from the fund before retirement, and this can be up to 100% of the value of the fund. This withdrawal is taxable but does allow you access to capital if necessary.

But a word of caution here: if you withdraw some (or all) of your retirement savings you will have to replace it with future savings, and often, this is very difficult to do. Still, if times are really tough and there isn’t another option for financial survival, then a preservation fund will allow temporary relief until you are able to make another plan.

 

Retrenchment packages and tax issues

If you are in the unfortunate situation of being retrenched, it’s important to acknowledge and understand that there are tax consequences to your retrenchment benefits.

If you have been with your employer for at least one year, you are entitled to one week’s salary for every completed year of service. This is called severance pay, or more commonly a “retrenchment package”.

At retrenchment, there are usually one or more of the following components that become payable as a lump sum:

  • Salary for notice period.
  • Accumulated leave.
  • Pro-rata bonus/incentives.
  • Retrenchment lump sum (or “severance pay”).

The first three components are taxed according to your marginal tax rate, in other words, it will be reflected on your final payslip and income tax will be deducted.

The severance pay-component is taxed according to the same table that would have applied at normal retirement. This table applies regardless of your age: if you are retrenched at 35 you will pay the same rate of tax of someone who is retrenched at 55.

This all looks great in principal: if I receive R600 000, the first R500 000 is tax free and I only have to pay tax on the remaining R100 000. Fantastic!

Or is it?

To better answer that question we have to rewind and take it one step back. One of the advantages of saving monthly into a retirement annuity or pension fund (or if you already have previous funds saved in a preservation fund), is the ability to withdraw a 1/3rd of the value in cash at retirement. The balance is then transferred to a life/living annuity that will pay a monthly income during retirement years – or however long the capital lasts.

As tax payers we are all allowed to take a full 1/3rd of the value of the fund cash, and if you have more than one retirement savings product you may take a 1/3rd cash withdrawal on each. The caveat is that you will receive a maximum of R500 000 tax free – this is across all your different retirement savings vehicles and it includes any previous retrenchment lump sums.

 

Let’s take an example:

Mr. Moneybags retires at age 60 with a retirement annuity worth R6m. He is able to withdraw a 1/3rd (R2m) as a cash lump sum. We already know that only the first R500k is tax free, and he then has to pay tax on the R1.5m (total tax of R472 500).

However, if Mr. Moneybags had a retirement annuity of R6m and a pension fund of R4.5m the scenario is slightly different. He is now able to take a 1/3rd of the cash of each (R2m and R1.5m) but is still only able to take the first R500k tax-free, and the portion that he now has to pay tax on is R3m (total tax of R1 012 500).

To get to the crux of the retrenchment-story from a tax perspective, let’s tweak the example one more time.

Let’s now assume that Mr. Moneybags was retrenched a number of years ago, and he received a severance benefit (retrenchment lump sum amount) at that time of R500k. He now retires at age 60 with his retirement annuity and pension fund and wants to take a full 1/3rd withdrawal from each.

Because he previously utilised the R500k tax-free portion when he was retrenched, the entire cash withdrawal will be now be taxed (total tax of R1 192 500).

 

 

The point that we would like to illustrate here is that tax benefits at retrenchment directly impact the level of tax benefit at normal retirement.

If you are retrenched and receive a lump sum benefit, you do not have a choice on how the tax will be applied. You will immediately start using a portion of your R500k tax-free allowance. Thereafter you will have to make a decision at retirement about whether you want to make further cash withdrawals from your retirement savings – being cognisant of having already used your R500k tax-free allowance.  

This is where the specialised advice of a Certified Financial Planner is of critical importance. Paying the tax in order to get the cash out of your retirement savings does make sense in many scenarios, but it will differ from person to person and you need to seek expert advice at this point – the conclusion will be different for each individual.

Let us know if you need help you with cash flow analysis, scenario planning and/or tax estimates for your particular set of circumstances.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

Planning for uncertainty

-By Elke Zeki

 

Most people build their wealth over a lifetime.  Very few make enough money once-off or in big tranches.  The power lies in the small compounding effect of a long term, disciplined savings plan.

We would therefore argue that taking a short “break” from your career should not have a significant impact on your retirement.

The biggest risks you face on being retrenched are the short-term survival considerations.  What do you need to do to get through the next year?  What are the biggest pressure points?

 

Liquidity

Having access to cash immediately is important and will give you a sense of security.  This includes money in a cheque account, access bond, credit card, overdraft facility and/or voluntary investments.

You need to be in a position where you can cover expenses for at least 6-12 months.

Yes, retrenchment comes with a severance package, but this is not always guaranteed and often not enough. You cannot rely on this.  You must make sure that you save during the years that you are employed.  Not just towards your retirement funds but voluntary, liquid investments as well.

Not having enough savings may also have the following unintended consequences:

  • You are forced to withdraw retirement savings to fund lifestyle or cover debt until a new job is secure. Sadly, many are forced to do this at great cost.  It is not ideal as these savings (Pension/Provident fund) serve another purpose and withdrawals are taxed heavily.  If you draw your retirement savings you need to make up for it with future savings and that is very difficult to do.
  • Anxiety may force you to take an opportunity quickly that is perhaps not the right job for you. Whereas when you have enough savings to see you through 6-12 months, it gives you time to introspect about what is important to you and what you really want to do.
  • Not having money makes the emotional recovery harder.

 

Losing cover

If your employee benefits include medical aid, life and disability, you will lose the cover.  You therefore need to take out your own cover once unemployed and your budget needs to take these costs into consideration.

 

Taking longer than expected to find employment

This can be financially devastating.  There are two very important tactics here:

First, start looking for new opportunities immediately.  Don’t procrastinate or take time off.

Here are a few short tips on effectively looking for work:

  • Use your network – this will be your best source of possible opportunities. Experts estimate that up to 80% of new jobs are found through networking.
  • When loading your information on LinkedIn or Pnet always uses searchable words to describe your experience and job titles. As an example, I will use Financial Planner and Wealth Manager instead of Director of Foundation Family Wealth.  Use descriptive, searchable words.
  • Have your CV checked and updated professionally.
  • Use quality recruiters if you have no success using social media and platforms such as LinkedIn.

Second, practice frugality.  Said simply, don’t spend.  You have to consciously choose to spend less.  This has an immediate effect on your pocket and is the only way to make your money last longer if necessary.

Substitutions for cheaper brands or buying in bulk are small examples that can make a big difference.  Of course, living frugally will only free up a certain amount of money each month and can certainly diminish your joy a little, but it is a successful, short-term survival strategy.  Your ultimate long-term goal is to improve your income rather than limit spending.

 

Your age

People nearing normal retirement age often find it harder to find employment again.  This event then forces early retirement.  If you have saved enough to fund retirement, it’s okay, but for most people this poses a serious problem.   Our cash flow calculations often show that delaying retirement for a short period may be the difference between retiring successfully and running out of money.  Therefore, the last few years are crucial and losing your job during this time is significant.

 

At Foundation our approach is to navigate uncertainty with empathy and sensitivity.  We also give clear guidance to help you make financial decisions that will enable you to take care of yourself and your loved ones until you find your feet again.

Our approach is after all, the foundation of our motto: Wealth for Life!

Let us know if you need help you with cash flow analysis, scenario planning and/or budgeting.

Are you survival fit?

 

<Foundation Family Wealth is an Authorised Financial Services Provider>