The moment you find out that you are going to be a parent, you want to do everything in your power to protect and look after your child. As parents, we want to ensure that we raise our children so that they may have a fruitful future.
We make sure that they eat right, are dressed appropriately, get the best possible educations, and we try to instil good values in our children.
Steps I’m taking as a mother
The one aspect we as parents often neglect to teach our children about is finances. To me, it is very important that my children understand the value of money and the importance of saving. I want to have the reassurance that my children will be ok when I am no longer around to look after and help them. Part of this includes knowing that my children will have financial stability.
I feel as a mother that it is important to educate my children about not only working hard for their money but saving for a rainy day as well as for retirement.
One of the ways I am providing for my children’s future is by opening their retirement savings now while they are young. Both my boys have retirement annuities in their own names which I contribute to monthly. The idea is that they will take over the instalments when they are working one day.
The advantages are not only fifty-five years of premiums, but fifty-five years of compound interest (This is of course if the retirement annuity is opened from the time your child is born). By doing this there is enough time for the compound interest to make a substantial difference on their investments. What is compound interest? Merriam-Webster defines compound interest as ‘’interest paid both on the original amount of money and on the interest, it has already earned’’.
Another advantage of a retirement annuity is that my children will not be able to access the money until they are fifty-five years old. In this way, I can ensure that they only use the money for their retirement. This way I know that they will be able to retire and will not have to rely on my grandchildren or myself to support them.
Currently, in South Africa, we live in what is called the “Sandwich Generation”, so called because adults are supporting both their parents and their children. They are supporting their parents because they were not able to save enough for retirement.
This means that these adults are feeling even more pressure financially and in most cases, won’t be able to save for their own retirement, which means that the Sandwich Generation will continue into further generations. By saving towards my children’s retirement, I am saving three generations from financial ruin.
Most families in South Africa today live on two incomes, in other words both parents are working. Another concern for me is, what will happen to my family should I pass away. My husband will need financial assistance if he no longer receives my income. Losing a member of the family is traumatic enough, I would hate to think of my family struggling financially and having to change their lifestyles. That why it is important that I leave a legacy for my family. A legacy is as an amount of money or property left to someone in a Will.
Options to ensure a legacy
There are two ways in which I can leave a legacy to my family should I die. Either I can take out Life Insurance or I can open an investment in the form of either a Unit Trust or Endowment.
In terms of Stats SA, the average women in South Africa will live up to the age of 72 years, while the average man in South Africa will live up to the age of 64 years.
R1 million straight life cover costs approximately R200 per month, for women, like myself, aged thirty-six. Live cover premiums increase as you get older while the cover remains the same, as per the table below.
Inflation is assumed to be 5% per annum for all risk premium projections on this quotation.
Premium Escalation Per Year
Year Premium 01/072017 R205.83 01/07/2018 R221.88 01/07/2019 R239.41 01/07/2020 R258.57 01/07/2021 R279.51 01/07/2022 R302.43 01/07/2023 R327.53 01/07/2024 R355.22 01/07/2025 R385.22 01/07/2026 R418.35 01/07/2027 R454.75 01/07/2032 R699.69 01/07/2037 R1,101.47
The average client keeps a life policy for seven years and then cancels the policy. The problem is when you cancel a life policy you do not get anything out of it and all your previous payments were a waste.
The benefit of a life policy however, is that I may take the policy out and pay R200 this month and pass away next month. In which case, my family will receive R1 million which would have cost me R200. However, the chances of one dying at a young age are one in twenty.
What about investments? An investment is advantageous because you can stop and start it whenever you like. If you are not able to contribute this month due to financial constraints the amount already in the investment will continue to grow. A Unit Trust is an investment which you can access at any time, whereas an endowment is an investment for a fixed period of either five or 10 years. If you access the funds within the five or ten-year time frame you will pay penalties. Sir Warren Buffet is quoted as saying: “People that think they can predict the short-term movement of the stock market — or listen to other people who talk about (timing the market) — they are making a big mistake. ”
The importance of starting now
As a financial advisor, I always encourage my clients to invest for the long-term if they wish to make a profit on their investment. Warren Buffet is quoted as saying that someone is sitting in the shade today because someone planted a seed along time age. One needs to determine their goals and what the money is for before they can choose which risk profile to invest in.
One of the benefits of an endowment is that you are taxed within the fund which means when the funds payout, they are tax-free. The investment has the benefit of compound interest. With life cover, you don’t get anything back when you cancel, whereas an investment you have something to show, that will continue to grow even if you cannot afford to continue to contribute.
The benefits of leaving an investment to my family are that if I fall short in my retirement years I can use this money to finance my life. Alternatively, my family can reinvest the money and use the interest for their living expenses, by doing so, the capital will remain and my family is looked after. It is my opinion that one should have a hybrid of both life cover and investments to ensure that your family is looked after.
If you would like advice on leaving a legacy for your family, please do not hesitate to contact me or one of the other members of the Stringfellow team.
 The South African Financial Planning Handbook