Solving The Riddle Podcast
Financial decisions shouldn't feel like a mystery. Solving the Riddle simplifies the world of money, providing the tools and topical advice you need to master your personal finances and secure your long-term wealth.
Solving The Riddle Podcast
How Much Is Enough?
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In Episode 02, Andrew and Alec tackle one of the most important — and often misunderstood — questions in personal finance: how much is enough? They unpack the complexity behind this question by exploring the key numbers that shape your financial future, from the capital you build to the income you ultimately need to sustain your lifestyle. Drawing on their experience in financial planning, they dive into the real questions people should be asking — how hard should your money work, for how long, and how much do you actually need to live off?
You’ll also gain practical insights into:
• The relationship between capital and income — and why it matters • How different retirement phases impact your financial plan • Why your strategy needs to evolve as your life changes • The importance of a dynamic plan in an unpredictable market • Understanding risks like sequence of return and portfolio volatility
By breaking down these concepts into simple, practical ideas, this episode helps you move closer to defining your own “enough” — and building a plan that supports it. _________________________________
Follow our personal accounts:@alecriddle @andrewwhitewood THE INFORMATION SHARED IN THIS PODCAST IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL ADVICE IN ANY WAY OR FORM. IT IS IMPORTANT TO CONSULT A FINANCIAL PLANNER TO RECEIVE FINANCIAL ADVICE BEFORE ACTING ON ANY INFORMATION SHARED.
Hey everyone, welcome to the remote. Financial help is shaping your future. And together with any riddle, we have the idea.
SPEAKER_01Right, we're back for another episode of Solving the Riddle Podcast. And Andrew, what an amazing response we had to that first edition. Absolutely blown away. Could not anticipate. Yeah, just amazing response.
SPEAKER_00Yeah, it was phenomenal, Alec. And I think the key thing from our side is just once again a big thank you to our listeners and viewers. And we super am super excited for our very next podcast.
SPEAKER_01Yeah, and yeah, keep on coming with any comments or questions. Encouragement, we love, but you're also welcome to offer constructive criticism as well. Indeed. So right, so today we are talking about a very important topic, something that's on everybody's mind. How much is enough?
SPEAKER_00Yeah, Alec. And in my world, I love breaking things down into pictures. And if you think about how much is enough, it's once again quite a complex question. But I think of four key numbers, right? It's we build up, we're accumulating assets towards a capital value. Um, naturally, we have longevity, we have how much we need to live off, how hard our money must work for us, Alec. But I think the key thing that I would like to throw back at you is capital versus income. What is the difference between capital and income when thinking of how much is enough and forky numbers?
SPEAKER_01Well, obviously, as uh financial planners, we know the amount of capital that's required. But when it comes to the client, the person who's retiring or whatever, he's only got one number in his mind, that's income. So he will tell you, I need, example, 50,000 rand. Now, the biggest problem that comes there, and we'll talk about it later, is we obviously got to equate tax in as well.
SPEAKER_00I agree.
SPEAKER_01So at the moment we're going to be talking about gross, we'll talk about the tax and the impact later. But essentially, it's if you know how much income you need, it's easy to quantify how much capital you need. But we need to have two sources of capital because the one is lifestyle, and we'll break that down later as well. But let's talk now focus just on the capital needed for income. So if I need, for example, 50,000 Rand a month, and that's gross, that's 600,000 Rand per annum. Now, depending on my investment strategy, I will need either 12 to 15 million Rand to get that number with increases every year for the rest of not the rest of my life, in fact, it's a finite amount. But for a long period of time, though. So we're looking at the example uh inflation plus four as an investment strategy. Um, that would last you for 33 years.
SPEAKER_00And I you speak about 12 to 15 million, right? Sounds like a lot of money, but let's also uh in my view, it's it's critical that we unpack the composition of that 12 to 15 million. So I'll start out that a lot of people, fortunately and unfortunately, accumulate that 12 to 15 million in one person's name to start off with. Okay, and then also a lot of people, unfortunately, but once again, unfortunately, accumulate that in work retirement funds. So it's very inefficient. So maybe I would like to throw back at you is what should we ideally be doing when accumulating our 12 to 15 million?
SPEAKER_01Yeah, I think I think the easiest place to save for retirement is through a retirement product, either through work or retirement ERT and so forth. Obviously, entrepreneurs might build up value in their business or through properties and so forth. And just before I go any further, just to say, you know, 12 to 15 million might be a daunting number for many, and you might think, okay, well, I might only have four million rand. Well, then, you know, based on our other formula, they would probably be able to get around about 200,000 to 240,000 max every year, uh, which then they can work out as you know sixteen or seventeen thousand rand a month. So there's a different level for everybody. Everybody's how much is enough is is unique to them. But coming back to your question of yes, it's important that you have discretionary capital because you've got you've got a lifestyle. You know, there are people that I've seen over the years who are multi, multi-millionaires, but they are poor because their money is locked up in these retirement products, and uh they run out of money by Tuesday, you know, for for capital needs. Yes, they've got the money for the month, you know, the the things to cover the groceries and the petrol and the rates and all of that type of thing. But what about going on holiday? What about going to visit the adult children who've now moved overseas? What about um vehicle maintenance, tires, what about maintenance, medical aid expenses, all of those type of things. So you need to quantify lifestyle, and that's very important, first of all. So you generally like to I like to cover that and say, right, we need five million Rand to fund the capital goals or the lifestyle goals. We then take that away from the total capital. So if you've got 15 million, we've only got 10 million Rand left for income. We can no longer safely say you can have 50,000. Now we have to reduce that component maybe to 40,000 because otherwise we're not going to have a lifestyle. Nobody wants to be a prisoner in their own home. One wants to live life.
SPEAKER_00I totally agree, Alec. And the the thing I'm enjoying here right now is we're starting to build out a picture like that blank canvas. I think the key thing just to explain to our viewers and listeners out there is that we've got tooling, we've got tech that we've embraced in our business that takes all these complex things, um, the number side of things, and starts building a picture, creates a framework once again. Just think of those four key numbers. I can already see that picture in my mind, Alec, and engaging with clients, engaging with people, and this plan is starting to almost we're building a foundation together. But I just want to take you back. You mentioned, for example, 12 to 15 million, you spoke about an investor or client with four million. I would just like a bit of a curveball is just safe drawdowns. And I don't want you to speak about the 4% rule or the 4.5% rule that Gemini or any language tool can spit out, because obviously that's changing, taking into consideration, for example, your age. So, Alec, maybe just unpack that in a little bit of detail for the listeners. Yeah, it's a moving target.
SPEAKER_01Um, so what is the safe drawdown? So generally, you'll see if you go into AI and look around, they'll generally talk about four or five percent, okay? Can I tell you what their frighting stats are in South Africa? It's probably close to seven percent, but that includes all the wealthy hundred million living unities. Average drawdown. The average drawdown is a few years. Not the safe drawdown. Okay, the average drawdown in South Africa is about seven. That's if you take all the big numbers, the 100 million who's only drawing 2.5%. But if you take the number of living nities on, for example, an old mutual wealth platform, the average drawdown is closer to 9%, which means that half of retirees are going to hit a brick wall in less than 10 years. They don't even know it. That is the problem with a static plan. So it's important to have a dynamic plan where you're reviewing every time. And David Blanchett, the guru in America, talks about, you know, if you have a dynamic plan, you've got a four times greater chance of success than if you've got a static plan. So that's also incredibly important that people are aware of that. So when we come to right, what is a safe drawdown? A lot depends on the investment strategy. So, you know, and we don't just put numbers into a computer and say, well, uh, based upon how you grew up and whatever, you are a conservative strategy, so we're going to put you in a conservative strategy. So risk profiling.
SPEAKER_00We don't do any risk profiling.
SPEAKER_01We rather say, right, let us work out what life's life it is you want to live, and then work out what investment strategy would be required for that.
SPEAKER_00To drive that plan, yeah.
SPEAKER_01Then we take the client through the investor education process. And I can remember about 15, 16 years ago, the mathematics professor coming to me, telling me the first two meetings how conservative he was, and I mustn't give him anything, moderately aggressive and whatever. And we worked out the plan, and to achieve his plan, we need to move him out of a conservative strategy into a moderate strategy. I know the very person you're speaking about. You know the person, yes. And um, I remember taking through the investor education, he said to me, but why don't we go for the regressive one? Based upon what you've told me, and now I understand it, we should be looking at that. And I said, No, then we're taking on too much risk. We need to take, we need to get the returns of as much certainty as possible. So we we went for somewhere in between aggressive and conservative, and 15 years later, today, he's still a very happy client, living the life he set out to achieve and having all the income he needs and going on as many holidays as he wants.
SPEAKER_00So, simply put, Alec, in my mind, he's invested in his required investment strategy, which is fundamentally important and a key differentiator in the way we do planning. So I think the key thing is also when we're speaking about investment strategies, Alec, a lot of the all the strategies we use are very much diversified, and that is the one free lunch that you do get in investing. But also just to speak from personal experience over the past call it 18 months to two years, both of us have started looking, for example, at hedge funds, right? So it's always evolving. So your investment strategy, we understand what your required return on investment is. You mentioned earlier inflation plus four, um, but there's also ways that we can assist with volatility, for example, to increase the likelihood of you staying committed as an investor, as a client to your required return over time. Alec, I just want to take us one step backwards and just speak about you spoke about lifestyle, you spoke about capital goals, and maybe just highlighting the importance of liquidity within one's financial plan. Because I think I just want to make sure that our listeners and viewers grasp how important liquidity is from a holistic financial plan point of view, but also from a tax planning point of view.
SPEAKER_01Okay, before I do that, I want to come back to your picture of the four numbers and using pictures. And I always speak about the power of visualization, and vision can be defined as a picture of the future that produces passion. Passion to want to stick to your goals, passion to want to make changes, sacrifices, and so forth. And I'll never forget this because my very good late friend uh Trevor Vaughn, when I first started working with him, and after a year or two of uh building this plan, he said to me, Wow, such a difference. I used to always think to myself, why am I going to work? And now I know why. I've got a picture of the future, I've got purpose. So that's very important. So, for example, let's use go back to the guy who's got a 15 million Rand profit and fund or pension fund, and he thinks to himself, he's trying to do it himself, and he thinks, I can get 550,000 tax-free, so I'll take that and I'll get the rest in income. Well, 550,000 Rand is probably going to cover a vehicle in one truck if he's lucky. He's got no further holidays unless he's drawing it out in income, which is very inefficient because now you've got to pay tax to get sufficient surplus income to pay for the capital tax. Potentially at 45% as well. Potentially, yeah. Alternatively, he could have taken after the 550,000, another 385,000 at 18%. Sorry, 220,000, 18%. Uh retirement withdrawal tables. Yeah. 220,000, 18, 18%, 385,000 at 27%, and anything above that at 36%. So what we do and we work out exact trade-off, how much liquidity do you need? Where is it most tax efficient to do the drawing? Is it at retirement, capital lump sum, or is it going to be more efficient to actually draw a little bit more income? But you have to have access to that liquidity to have a lifestyle. Because income is one thing and it's an important thing. But without the lifestyle, what's the point in 40 years of work?
SPEAKER_00And Alec, you you spoke about at retirement, right? But I think where we as financial planners see the true value is pre-retirement, right? So we want to start working with clients ideally at the age of 30, ideally at the age of 25, so we can start that planning. Retirement annuity, for example, unit trust, tax-free savings investment.
SPEAKER_01Well, two weeks, just two weeks ago, we spoke about some of those things. You know, uh, Matthew starting early at the age of 30, putting 46,000 Rand into a tax-free savings account. By the time he's 60, he got 5 million Rands tax-free. His liquidity needs are almost taken care of, just on that one thing. So it's it's those types of things. It's a holistic planning that picture the future, get that vision. We'll help the uh the we help clients to do that. You know, we we create multiple scenarios. We can do it uh live as well. Where I mean just yesterday, a client said, Well, what happens if I do this? And what happens if I do that? And he sees the graph changing, it's very powerful.
SPEAKER_00So let's speak about that live experience because we all do it live or at Private Wealth Management. We use our tooling, um, which allows us to create the scenarios that you referred to, Alec, and have this like live conversation, this live engagement. But let's just look at expenses, okay? Expenses in retirement, and naturally, I know you do this. We have lifestyle expenses, so for example, that's for your groceries, your rates and taxes, etc. But we split out medical aid, so the medical aid premium or medical aid cost, and we escalate that cost at a much higher escalation year on year compared to that other basket of expenses. In our world, we know that as the rule of 72, okay? And I just want you to unpack the rule of 72 for our listeners and viewers.
SPEAKER_01Yeah, it's very important because people often ask why does a lot of money run out? They think, have I got 10 million rand and I'm getting a 10% return as a million, I'm only spending 600,000. How can my money ever run out? Well, that's inflation. So let's talk about inflation. You mentioned lifestyle expenses, let's bracket a lot of them. That's your food, your rates, etc. Let's say the average there is six percent. Okay. So on the rule of 72, you divide six into 72 and you get 12. It's gonna take 12 years before that amount of income needs to double. So if it's 30,000 now in 12 years' time, you need 60,000. So that expense will go from 30 to 60,000. And over 24 years, it will go to 120,000. Now it's important this modeling is built into your model. Right? But now what about medical aid? So you start off with medical aid, and let's say the medical aid is 10,000. Okay. And the medical aid inflation we know is about 10%. So divide 10 into 72. I know it's 7.2, I'm gonna call it 7. Yeah, round numbers, please. So after 7 years, it's 20. After 14 years, it's 40. After 21 years, it's 80,000 Rand for medical aid. Most people get caught out on that one. But we build all of that into the plan. So that's very important. So you can't have one set inflation. What we also do, and John does this quite successfully, one of our uh fellow planners, he uh builds up, uh, he's got a calculator to build up personal inflation. Like a track record, yeah.
SPEAKER_00And we're speaking about that, and I was actually going to raise that point that we're using six and ten now, but it could be slightly different for a client or investor out there, it could be six and a half, it could be five and a half. It also depends then which phase of your life you are. Are you in the go-go years? Are you in the slogo years? Are you in the no-go years of financial planning? And then your your basket of expenses will be more skewed, yeah.
SPEAKER_01And that's the three phases of retirement you're referring to. Uh a concept I learned at the financial planning convention in San Diego, yeah, way back in 2011. A wonderful presentation that you know, you've got different phases of retirement, don't think it's one static line. But coming back to the personal inflation, what's also very important, remember the government had bands of inflation aiming it towards six percent. They're now aiming towards three. The bottom end. And they talk about CPI being two and a half or three and a half percent. Nobody, none of our clients' inflation is two and a half or three or three and a half percent. So we have to have a personal inflation rate.
SPEAKER_00And that's directly related back to those phases. Obviously, your basket will skew over time, depending on the different phase of your retirement, moving into old age homes, etc.
SPEAKER_01Yeah, and coming back to those three phases of retirement, let's just touch on that for a moment. So let's say your retirement's gonna be 30 years. We never know, we know it's never gonna be an equal split. Let's say the first 10 years is the phase one, the go-go phase. So this is when you reward yourself for 40 years of hard work, you're mentally capable, you're physically capable, you've got a bucket list of items. This is where you go see the world, you do everything you need to do. Uh-huh. The next 10 years, the natural slowing down, phase two. So you mentioned it, slow go years. So maybe there won't be as much international trouble. So there's less needs in phase one. But phase three is the no-go years. Generally, one partner's maybe had some health issue or maybe even passed, and generally it's almost like you're staying at home and the kids are coming to visit you with the grandchildren. And obviously the needs then are a lot less. So you can tailor the needs in retirement, and this is especially important when a financial, when a person's challenged with their amount of capital. You know, sometimes we have a client who comes and see us with five million rand. We've got to make it work. The goal is get the client across the finish line.
SPEAKER_00I think the big challenge that I'm experiencing, Alec, out there with when engaging with clients is having a look at their plan and taking into consideration longevity. People are just living longer and longer. So we've been speaking about like 30 years now. So if someone retires at 65, add 30, that's 95. And a lot of clients not necessarily laugh, but they have a chuckle about that. But I think the key thing to understand once again, everyone listening and watching, is that people are just living longer and longer. They say the first person to live to 150 is already on planet Earth. And I think that's a scary thing for people, but that's an opportunity for us, and that's the importance of partnering with a certified financial planner that's doing holistic planning, that's using tooling like we are, because you've got a plan for those eventualities. People are going to live to age 100. So the thing that I'm already thinking of, and I think you're thinking of, is for example, like a living annuity and a life annuity. Do you just maybe want to unpack for the listeners how we can combine different investment vehicles to potentially enhance longevity?
SPEAKER_01Sure. And if I can just take a step back, I remember when I came into financial planning, most plans were developed to mid-80s because the mortality rate was expected to be 8183, maybe to 89.90. We will not dare do a plan now that doesn't last to mid-90s. Yeah. Hopefully 99 or 100. And that's very important. How do you get a how do you get that money to last that bit extra? Well, you have to look at the investment strategy and you might need to change things. We've we've I mean we've made enhancements to clients' plans. 20 years ago would have been just a balance fund, we'd add a smooth fund, we'd add offshore feeder funds, we'd add hedge funds, and then coming to your question, we'd add guaranteed annuities. So I was very fortunate to pilot a project for one of the big insurers uh in 2023 on hybrid annuities, which is a blend of a living annuity and a life annuity. Just to explain the difference. A living annuity is where you take money and you invest it and you draw out of the capital for your income.
SPEAKER_00And you take the risk as an investor.
SPEAKER_01You take the risk as an investor, but in a good financial planner, there is essentially no risk. There is volatility, but yeah, we can minimize the risk. Shouldn't say no risk. Okay. And then you've got a life annuity where you take money to insurance. What rate will you give me as a pension for the rest of my life? And it must increase. And if I die, I want my wife to get the income. 100% or 80% or whatever the case is. Okay. Now 10, 15, 20 years ago, you had to make that choice. Now we are so fortunate with product enhancements, uh, legislative changes, we can blend the two together. And you don't have to have a 50-50 split. You can have a bit of a bit of both. So now you we will work out and say, right, um, I mean I worked out for a uh a client just this week that we put them into uh a blended inuity um just uh two two odd years ago, and the rate was nine point well the rate now is nine point eight percent two years later. So the starting rate is about eight point six, I think. Nine point eight and it will increase every single year. And if he dies, the wife gets it. If we took that same rate today, 7.2%, it has come down over 20%. So that's the other thing. As much as investments go up and down, the rates go up and down as well. So you always need to be keeping your eye on this, advising your client, the rates are good, let's consider bringing in some guaranteed income. And because the best legacy you can leave is to not to not to have to knock on the children's door.
SPEAKER_00And we we had a look at life annuities uh going back two years now, right? We thought it would only help clients that were under a little bit of pressure from a longevity point of view. But then the penny dropped for us one day, and my mom uh is a prime example, and we actually used this in her plan. So she's very frugal with her money, and she didn't necessarily need to go into a life annuity with a portion or percentage of her money because her drawdown was very manageable on her living annuity. But the key thing to note is that the way we started and are looking at life annuities now is it's a different asset class, right? So and it just can create so much value for any type of investing clients. Like you say, your starting drawdown, your personal circumstances are important, what do you want to achieve with your money? But I think the key thing is that the perception out there in the market is that a life annuity is for someone that has an underfunded retirement. And I don't think that's accurate.
SPEAKER_01Yeah, I think um we've been able to show show this, and as you say, you know, years ago you thought, well, let's wait for the client to get to 75 because maybe the further down the age curve. But the yields don't wait for the age curve. You rather look at the yields. And yes, there's massive value you can add to people who've got more than enough money. They can actually leave more money to their kids by purchasing a portion into a life annuity. Because I'll give you a simple example, uh a client uh for some reason or other their uh living annuity drawdown was approaching that real danger zone of about nine percent. And um we needed to get that drawdown down because we've still got a 20-year runway. So what did we do? We took half of the income and so we need nine. We managed to get half of the income because of the age at 12%. Right? So now if I need nine and half of the money's giving me 12%, the other half only has to give me six. So we've got half of the money in a life annuity giving them 12%, the other half of the money in a living unity, we've reduced the drawdown from nine to six. We have doubled the duration of their plan. No danger of knocking on the children's door. And for the guy cried in my office and said, Well, I'm now going to be able to sleep easy.
SPEAKER_00And it's just a phenomenal value that also just gets added, taking into consideration that you're reviewing plans constantly, right? You're reviewing plans constantly, we're reviewing plans constantly, and we have a framework in which we can actually create these pictures and tell a story. It's one thing throwing math at people, okay. Numbers do make sense to a lot of people. Certain other people won't comprehend the numbers. A lot of us actually work based on pictures, and once again, bringing back to the four key numbers integrated wealth planning, the scenarios, and this is what we're constantly doing. And obviously, we're in our previous podcast, we spoke about, for example, capital gains tax, and we can also highlight those benefits over time and all those small nuances within the structure of financial planning that we use on a day-to-day basis.
SPEAKER_01Yeah, and I can just bring in something else. It touched on vision earlier for the clients, you know, vision, picture of the future that produces passion. My vision in financial planning is to ensure that the client gets from A to B. There's a starting line, there's lots of obstacles, got to get over them, got to get to the finish line. Now, I may not be here to oversee them crossing that finish line or take the photo. And that is one of the reasons I encourage you to come back to P in Financial Planning because should I get hit by the bus or should I exit in five years' time or whatever, you're the ideal successor, and you can ensure that every single one of my clients gets across the finish line because you know how I think we've always bounced ideas off each other and so forth. And that is what we want to try and do, is just you know, it's it's essentially it just comes down to one thing get the client across the finish line, help them to achieve their lifestyle goals, help them to go visit their kids overseas if that's what is important to them.
SPEAKER_00And Eric, we've seen so many studies, so many statistics with regards to people retiring, and it's a big decision. We we totally get that. It's probably the second biggest decision behind the person you decide to marry. Um, but a lot of people make big decisions at retirement and then just switch off, right? And they fall asleep at the wheel of life. We call it the wheel of retirement, and like you referred to earlier, it's only when you see clients 10 years after retirement and they haven't been re uh viewing their plan and they come to us now. Unfortunately, they sometimes expect us to have like a magic wand. Um, but the key thing is you need to be consistently and regularly fine-tuning your plan. Previous podcast, as well, we spoke about the budget speech. So much stuff can change at the drop of a hat, the strike of a pen. So I think the key thing from my side is obviously reviewing one's plan. Yes, I.
SPEAKER_01Yeah, I want to go into that reviewing. So if you are not having your plan reviewed on a regular basis, I'm talking about a minimum once a year, you are increasing the probability of failure from 10% to 40%. It is a frightening statistic. But those are the stats that can that are out there. And um, yeah, just having a dynamic plan, looking at well, what is your personal inflation, what is the current investment strategy, what has changed, what are the new product enhancements, what's what are the legislative changes, what can be done? Um because most people cannot see beyond the mountain. Most people can only see the next few years. We, with the tools that we've got and the experience we've got, we can see 20, 25 years into the future. And what unearths in 20 or 25 years' time is a result of what's happening now or in the next two or three years.
SPEAKER_00One thing I've just been thinking about, Alec, here we're speaking a lot about people in retirement. Okay, how much is enough? Obviously, focusing on four key numbers, building up to that asset value. But I think the key thing I just want to touch on now, pre-retirement, is so much is changing in people's lives. If you're younger, you're building up a family, you have one kid, you have two children, uh, you have a mom or dad that might become reliant on you. There might be loan agreements between parties, interest-free loans, etc. It is so important also to review your financial plan while accumulating wealth. And there's other facets, for example, death planning, disability planning. There's nuances there, buy and sells, contingent liability policies, key person policies. And you can see I'm getting excited here because Yeah, you're moving into small business realm now, which is slightly different. But yeah, but it's just all about, I think I just want to make the point about reviewing is, and we focused a little bit, yes, and I understand four key numbers on retirement, but it's important to review your plan pre-retirement because we can add so much value there too.
SPEAKER_01Absolutely. Most, you know, we had a client email us this morning about wanting to do a top-up to their tax-free savings account. And I'm sure they were thinking of contributing 36,000. Yep. And you know, fortunately, Nikki Mapia immediately emailed them and said, just before you do, um, we just need to let you know that the tax-free savings account has gone up from 36 to 46. Okay, great, we'll make 46. You know, and if you're asleep at the wheel, you're not going to do that. You're just going to continue because who follows the budget speech, except for financial planners like us, who try and unpack it for everybody as we hopefully did successfully two weeks ago.
SPEAKER_00You're making me laugh, Alec, because I was just thinking of rule of 72 again. And I I explained to you a little bit earlier, I had a meeting with clients, uh, positioned the rule of 72, and then what I did, I went and uh created a nice Excel spreadsheet and sent a snapshot to the client, and they thought it was amazing. But yeah, it's amazing how these sort of things make us tick. So the next one that a lot of people probably have not heard about out there as investors, potential clients, etc., is sequence of return risk. And this is something we've spent a lot of time on. We've probably worked on this for about 15 years, I think. And I think we're finessing it even more. Well, I shouldn't say even more, but constantly going forward, I think we will be finessing it because the the world of investments is always changing. Um, but sequence of return risk can be quite daunting, and um, it can work for certain people, it can work against other people. And I know you got a great example that I might nitpick a little bit, but let's let's fire away, Alec.
SPEAKER_01Well, let's go back when you still worked for me back in the days, and uh we used to chat to a performance analyst in Cape Town, he'd send data and he would build calculators. I think I've got over a hundred calculators on my laptop. Uh so we can put any cycle can fund into that calculator and work out what the sequence of return risk is. So we've got a really good understanding of it. So at last year, around about September, October, um, I did three presentations uh on this particular topic, and we used an example of a client who had uh accumulated uh 10 million Rand and he had 10 million Rand going into retirement, and if we were projecting ourselves forward and looking back 24 years, and we found that the one fund did 10.6% and the other did 10.3%, which fund going into your retirement would you have wanted to be in? The one with a higher return, surely. Yeah, well the 10.6 would give you uh after 24 years a no withdrawal is 99 million. The 10.3 on the other hand would give you 93 million. So six million difference, plain and simply six million difference, yeah. So on f because the returns are better. That's that's the compounding effect of 0.3% per annum. Okay, over 24 years. That's significant. But here's the thing if you run through the model and look at the volatility, now an actuary at Investec, uh Jakob Fontonde is 91% now. Sorry, 91, yeah. Um, he's done some amazing research that if your volatility in a portfolio is 8% and you move it out to 15%, your probability of failure goes up four times. Okay.
SPEAKER_00So you need to know what you're kind of doubling volatility. Yeah, yeah, yeah.
SPEAKER_01So you need to make sure that your volatility, particularly where you're drawing from, is as low as possible. So if we look at those two funds, 10.6 and 10.3, what are most clients going to do when they're going to retire? They're going to look at the fund fact sheet, what is the performance? They're going for the best performance. But generally, maybe the best performance has the most volatility and they don't know where to look or they don't know what they're looking for. Whereas we do and we run those numbers for somebody who's drawing 7% per annum. So 700,000, which is a high drawdown. Increasing every year. The B fund, the one that only returned 10.3%, proved to be the better one. The 10.6% failed. Did not get the person across the finish line. Was that because of volatility? Because of sequence of return risk. Got off to a bad start. A lot of volatility, ate into the fund early, never recovered. The other one had protection. And as a result, over 24 years, it produced 6.5 million rand more income for the client and 6 million rand more capital for their beneficiaries, 12.5 million rand difference for a fund that on face value was doing worse than the other fund.
SPEAKER_00So that explains it's like a pattern, Alex. So, like you say, if you're you get off to a good start, or if you get off to a bad start. I think the key thing for me is financial planning is so intricate, right? And there's so many different facets to look at. And speaking to the point of sequence of return risk now, we're speaking about individuals that are drawing income, but the inverse is applicable to someone that is actually accumulating wealth, Alex. So someone that's saving on a monthly basis. Now you want more volatility. We want that volatility, and it's crazy. So, but the thing is to think we've only got one market to invest in, but with I'm speaking to younger clients, older clients, your the way you approach their investment strategy and style and the conversation is different than the principles that you've got to explain to clients. Because they go home, sorry, Alec, they go home and have a chat to mom and dad, and they're thinking, goodness, Alex's saying one thing, for example, and the son and daughter, for example, are engaging with me, and we we're co-creating a plan, and I'm having a slightly different conversation, but there's key nuances in why this actual strategy works for you because we're taking advantage of volatility. And in your example, you actually want to minimize volatility or minimize downside participation. But you wanted to say something, I think.
SPEAKER_01No, I just want to say, you know, obviously I'm working more with clients who are at retirement or in retirement, and you're working more with uh clients who are building towards retirement. So explain why somebody who's 40 would want more volatility in their portfolio when they've just heard from me that their dad, who's 65, wants less volatility.
SPEAKER_00Yeah, so I think the key thing is that when you are saving and markets are going up and down, okay, if you look at equities in general, they get a trend upwards over the past call it century, the the price of a share or stock or what we call them equities has always trended upwards, okay? But it has been a volatile journey. So you could have uh great years like last year, but then you're gonna experience downturns like we're currently experiencing uh because of the Middle East crisis, Alec. But the key thing is that we call it a unit price. That unit price is going up, so that's the price of the share going up, or it's going down. But you are, for example, always contributing 10,000 Rand a month or 3,000 or 5,000. But as the market goes up, the unit price goes up. So you are in effect buying less and less units with the same amount of money, your 3,000, your five, or your 10. So what you want to do when you're accumulating wealth is you want that volatility. Naturally, we want the unit price or the price of shares to increase over time, so go, for example, one to a hundred, but you don't want it to go in a straight line. You want that rand, what we call rand cost averaging, because you want that average of your unit price purchased over time to be as low as possible. But obviously, if you have two lines, you both want them to end up at 100 bucks, so that's your unit price or your stock price, but you want this up and down journey where the average of the units purchased over time is as low as possible, say 20 versus 50, because then you've got so many more units, and it's simple math at the end of the day. You take a poiki pot of units and you multiply it, multiply it sorry, by the unit price or share price, and that gives you your fund value at the end of the day.
SPEAKER_01Let me move it from a poike pot to a bride and simplify it. Because uh my wife is my wife does the poiki and it's a lot more complex than my bra. So I want to simplify it for the listeners and viewers here. If you're putting 10,000 rand a month into an investment and the unit price is one, or sorry, make it a thousand, right? You're buying ten units.
SPEAKER_00Yeah.
SPEAKER_01If the market goes up and the unit price of that share becomes two thousand, you're only buying five units.
SPEAKER_00You're buying less and less.
SPEAKER_01You're buying less and less. But if the price dropped from a thousand to five hundred, you're buying twenty units. You want as many units as possible so that when the market is up in in 20 or 30 years' time, you get a good multiplicative average and you get far more money. And that's the opposite of what happens in retirement.
SPEAKER_00The inverse is applicable. So obviously, when markets sell off in retirement and you're selling units, you have to sell way more units to fund the same amount of income. So, Alec, you and I mentioned 30, 50,000, 60,000 Rand a month. You can just think how quickly, if there's a sizable decrease in equities or shares, you could have to sell so many more units to fund the same amount of income. So one investment market, but we approach it totally differently for two different sets of investors. I think it's it's quite phenomenal, Alec, to be quite honest. Absolutely.
SPEAKER_01You know, I once did an article and uh I must dig it up sometime. Two Goodyear employees. Um they both started work at the same time, and the one um signed up for his pension fund and he took the default option. The default option to protect the trustees is usually a very conservative one. The other client took some financial advice and he went for the aggressive option because exactly what you said, you want more volatility, and that comes in a more aggressive portfolio. And the difference when they retired was three million Rand in the favor of the person who had the more volatile portfolio. Because they plan and simply add more units, bought more units over the years. We need to touch on tax. So I want to I want to just uh talk a little bit about uh two incomes versus one. Um very often what happens you have one breadwinner who accumulates all of the assets, they get to retirement, they've done fantastically well, and suddenly they realize hang on, if I'm gonna draw 50,000, I have to pay 11,000 tax. So they or let's say 10,000 tax, so we need 40,000 net. Now imagine you have two sources of income. So the one spouse draws 30 and uh 30 and uh um pays tax maybe of six and gets to 24. Well now you only need 16 from the other spouse to get to 40. And if there's 65, well almost all of that 16 is tax-free. So you're paying a lot less tax. Now, how do we do this? So think of the businessman or the entrepreneur and whatever the case is, and um you know we've got to come with good advice here. So this is not uh aggressive uh tax avoidance in any sense, because that's not allowed. But uh, if your wife works in the business and you give her 20,000 rand a month, don't let her go buy all the groceries and everything for the household with that 20,000 rand. She should be investing and you should be buying the groceries out of your 80 or 100,000 rand. So that she accumulates four or five million rands worth of assets, you accumulate maybe ten or twelve million rands worth of assets, and in retirement we've shown for clients that we can save over a hundred thousand rand a year for couples in this way, and you do that every single year for retirement with escalations, and it's uh SARS approves of it, no problem. So it's just important that people again, you know, they think out of the box.
SPEAKER_00Also, from a tax savings point of view, Alec, um you spoke about the two silos, there's also different investment vehicles that we can use. So, for example, we've got Mr. We've got Mrs. Uh, we've got a retirement annuity, which for example goes into a living annuity, but we need to take advantage of a unit trust because the income that we draw from a unit trust is not taxable, taxable like income from a living annuity, for example. The growth on a unit trust is yes taxable. And then the the eighth wonder of the world that we spoke about a little bit earlier, um, and also in our previous podcast was a tax-free savings investment. So that can also be added with regards to funding monthly income. So totally agree. But I thought eighth wonder of the world with compound interests.
SPEAKER_01So we've got a ninth one of the things. Yeah, we were just building them out now.
SPEAKER_00I think the key thing is two silos are fundamentally important. Like you mentioned, donations also between spouses is free of tax. I think the key thing is that we do all these things taking into consideration tax legislation, and we're not avoiding tax, we're just being efficient. Um, and the two silos are important, but those investment vehicles are also fundamentally important. How you build up towards retirement and then how you structure them in retirement, for example.
SPEAKER_01Yeah, and the other thing is also, you know, which investment goes in which spouse's name. So, if, for example, you've got a spouse who's at home, doesn't work, and whatever the case is, well, she also, if it's a she also has a tax threshold. Well, you'd want the unit trust in her name because the capital growth, you could get so much more than the 50,000 we spoke about earlier. You could potentially get 200,000 rand capital gain free. Exactly. So, yeah, it's all these little nuances, and uh, you know, we we we try and put it together for and also another thing that's just sprung to mind is estate planning, Alec, for example.
SPEAKER_00And we've had naturally we've got some clients that are getting older and older, and you've got to be efficient from an estate planning point of view, so you don't want all the assets in Mrs. name, for example. You want to try to split it as efficiently and as effectively as possible from a tax point of view, but also from a transition of asset value point of view as well.
SPEAKER_01I think the one thing you know, the listeners and the viewers will realize there's a lot more to financial planning than first thought. It's a very complex arena. There are so many opportunities to better yourself, to accelerate financial independence, and so forth. One of the topics we'll be talking about in the future is for those people who've got themselves in the debt trap. How do we detonate that? But for now, I think the important thing is I just want to encourage, you know, last time I said, you know, we've got a whole team of financial planners nationwide at private wealth management, but it's not just about our company. There are fantastic financial planners throughout the country. It's not about seeing us or our colleagues. I want to encourage each and everybody listening, everybody watching, to try and go seek financial planning advice. Go and see a certified financial planning professional. If you see there are financial planning uh presentations, go and listen to people. You will pick up bits and pieces of wisdom. You know, subscribe to our podcast. You'll get something new every second week. We're loading we're loading a new podcast. You know, so like, subscribe, comment, ask the questions. We want to grow this community. Uh, we're encouraged by what happened two weeks ago. I've done anything from your side, Andrew.
SPEAKER_00No, just in closing from our side, just a big thank you, Alec. Thank you to the listeners and the viewers. And this is a fluid process. Um, we've been in this industry myself for the best part of 15 to 20 years now, and things are always changing, and we've always got to engage, we've always got to review. Things are changing globally, things are changing locally, but we have the tools, financial planners in general have the tools to help people. People need to become more informed. Investors and clients are becoming more informed. The key thing is also we need to partner, we need to co-create, we need to use things available to us to enhance our knowledge and to increase the likelihood of us all experiencing a successful retirement. One last thing.
SPEAKER_01Probably gonna get the ire of some people in our industry. But on one of the podcasts, we commit to unpacking fees because most people are scared to see a financial planner because the thing gets beyond them. It's too complex, the fees are too high, whatever. And we want to unpack that and help people to understand why there are fees, what the fees are for, what is the value that comes from those fees. You know, sometimes we'll have a value audit with a client and justify why we are charging a fee. I've never had a client who's asked about fees once I've justified value, say to me, in fact, one of the clients, uh, when I went through the value conversation with him, said he came for a discount on the fee. When he left, he said, can we increase it? And uh I said, No, it's not necessary. He said, Well, just in just increase it a little bit because you're doing so much.
SPEAKER_00I thought it was amazing. It's all about transparency as well. I totally agree. It's stuff that is not really a hurdle for you and I, and think certain planners in the industry, um, but our industry has got a bad name previously based on the old convoluted products that uh uh charge, unfortunately, people uh a a high amount or uh large fees. But I think the key thing, the way we run our business and that Private wealth management, we're fully transparent, and our clients are willing to pay that fee because they see value.
SPEAKER_01Yeah, so if you want to hear about fees, so you want to hear about anything else to do with financial planning, make sure you subscribe so that you will always be the first to hear when the next podcast drops. So thanks very much for listening. Thanks very much for watching. See you next time.