I am fortunate to be involved in retirement planning. It allows me to see how people who are at the point of retiring plan to provide for the final stage of their lives.
In our initial discussions, my clients and I get to know each other, we discuss their careers, families, dreams, concerns and other issues.
My experience as a financial planner and an investment specialist helps me to gather the relevant information but, ultimately, good retirement plans hinge on the question: what do you expect to earn as a monthly income from your retirement capital?
That answer, together with the amount of capital you have available when you retire, will determine your retirement plan.
I was once challenged to say how much a person can withdraw as a monthly retirement income from each R1 million they invest, if those withdrawals keep up with inflation each year and the buying power of the capital is maintained.
At PSG Konsult, we assume that inflation plus four percent is a sustainable return. Therefore, with inflation currently at six percent, you can expect a diversified investment strategy to provide a sustainable return of about 10 percent a year (after costs but before tax). Your investment will earn less in some years and more in other years.
You cannot withdraw more than R4 250 a month for every million rand you have to invest at retirement, assuming you want that income to keep up with inflation and to maintain the buying power of your capital.
Depending on your tax status, the amount you can withdraw may be even a little less. Bearing this in mind and considering your monthly income needs, I draw up a unique retirement plan for you.
Warren Buffett said that "to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
Your retirement plan must address at least three needs that most people have when they eventually retire:
- Peace of mind;
- Protection against inflation; and
- Long-term capital growth.
Peace of mind is important because people who are about to retire are normally extremely unsure about this new phase in their lives. They don't know whether their income will be sufficient and their capital will be safe.
In addition to these money worries, they need to refocus their activities and, in some instances, must learn to once again spend time with their spouses and to give each other enough space to do their own thing. This might be a time to travel, but you need sufficient funds to do that.
Inflation is the dreaded monster that erodes your buying power. At an inflation rate of six percent, bread that costs R5 today will cost R10 in 12 years. Medical inflation, which currently runs at about 10 percent, means that your medical scheme contribution of R2 000 a month today, will increase to R4 000 a month in seven years.
People also tend to live longer nowadays. You must plan for your retirement capital to last well into your nineties. Therefore, if you retire at the age of 60, you must make sure that your capital lasts for at least 35 years. To achieve this objective, your investments must be exposed to the equity markets, locally and offshore.
Equity investments are made for the long term and any negative movements in the value of equities are normally only a short-term occurrence. The longest negative streak in equity markets over the past 40 years has been four years.
Therefore, if you plan for a time horizon of more than seven years for your equity investments, you can have peace of mind that your investments will earn solid, real (after-inflation) returns.
Who is Dawie Klopper?
Dawie Klopper, an investment economist, financial adviser and a director of PSG Konsult, was one of the six finalists in the 2007 Personal Finance/Financial Planning Institute (FPI) Financial Planner of the Year competition.
The finalists and the overall winner, Ian Beere, of Netto Financial Services, were honoured at the FPI's convention earlier this year.
In order to be chosen as a finalist for the award, advisers have to submit a financial plan based on a complex case study drawn up by industry professionals, have their practices audited and be interviewed by a panel of judges.
Klopper's 26 years in the investment industry no doubt helped in his being chosen as one of the finalists this year.
He started in the industry in 1981 as an equity analyst at Sanlam. Thereafter, he spent some time as an economist at the Afrikaanse Handelsinstituut, an organisation representing employers.
Next, he was appointed portfolio manager at stockbrokers George Huysamer and Partners, and then became head of portfolio management at Absa Trust.
In 1997, Klopper moved to PSG Investment Services as an investment economist. That year, he opened the Pretoria branch and became the chief executive officer of PSG Fund Management.
In 2004, he joined PSG Konsult, the financial planning division of PSG. The practice specialises in investments and retirement planning.
Klopper holds a BCom (Econometrics) from the University of Pretoria, an honours degree in economics from the University of South Africa, and a Master's in business leadership from Unisa. He obtained his Certified Financial Planner qualification in 2005.
Klopper regularly participates in a number of financial programmes on radio and writes a regular investment column for Rapport.
Klopper is married and has two grown-up children.
He is a long-distance runner, who has completed 10 Comrades marathons and this year The Great Wall of China marathon, which he describes as "the most difficult marathon by far that I have ever attempted".
He is also actively involved in church work.