WARREN INGRAM: How to fix your retirement plans for life after Covid-19
Pathetic returns on cash will push investors to look for growth, particularly in shares
Whatever happens with the remainder of lockdown, there will be severe economic damage and it is going to take years for people to mend financially. So what can you do to ensure your investments have the best chance of recovery?
Increase your allocation to shares
Cash has been a wonderful place to invest over the past five years, especially when the JSE has been awful and the rand has been so volatile. Unfortunately for cash investors, low interest rates make cash a bad choice in the years ahead. It is likely that money market funds will deliver only a 5% return by year end. Even if inflation is below 4%, the potential returns from cash are too low. This is especially true if you are in a higher income tax bracket where you might lose 40% of your interest to tax.
Fortunately, low interest rates are positive for shares and property. This is a natural counter to the terrible economic conditions in SA, but pathetic returns on cash will push investors to look for growth and that will be favourable for shares. Many shares on the JSE are now offering great value. Consider reducing cash within your investments and increasing your allocation to shares. This does not mean you should allocate all your money to shares. A diversified portfolio is still your best option. It is all about achieving the right balance between cash, bonds, shares and property and maintaining this balance over the long term.
Have the correct offshore allocation
A study by Allan Gray Research shows that over long periods, such as 30 years, an offshore allocation within living annuities of 30% has proved to be the ideal amount. This means it achieves the best balance between getting capital growth and a sustainable income and limiting the impact of volatility.
Investors who plan to live overseas or who have surplus investment capital would naturally need a higher allocation. I believe the ideal range is 25% to 75% offshore, depending on your wealth and long-term residence plans.
Change where you work
You can save a lot of money in travel expenses if you convince your employers to let you work from home. My anecdotal research shows that many employees who normally must travel for between 30 and 60 minutes to work, have saved anything from R1,000 to R3,000 a month while in lockdown.
If you are one of those people who are lucky enough to have retained your job and can work effectively from home, consider asking your employer to make the arrangement permanent. After lockdown, employers will have fewer excuses to force you into the office if you have been effective at home. You can remind your employer that they will be able to reduce their office costs in future as they no longer need to provide space for you.
If you are able to work from home, you will not only save a lot of money in travel expenses but also possibly future car purchases if you extend the time taken to replace your car from every five years to every seven years or longer. It also means you can spend less money on work clothes, and you will have an extra hour or two not being wasted every day in traffic. As a final point, you will also be doing your bit for the environment as you will be burning less fossil fuel.
Plan to work longer
It is not great to plan to extend your working career, but every extra year that you work has a big impact on your retirement planning. You almost score a double benefit because you have an extra year to save more money and you are reducing the number of years of expenses that you must fund from your savings. To ensure that you can remain relevant in the job market for as long as possible, try to keep learning new skills. It’s also good for your mental wellbeing.
Reduce debt faster
With interest rates at 50-year lows in SA, you should try to reduce your debt even more quickly now. If you pay extra money into the mortgage or credit card now, it will have a much bigger impact as you will be paying off capital at a faster rate. The faster you can eliminate your debt, the more you can add to savings to financially recover from Covid-19.
Reassess the non-negotiables
If you have children in private school, you are probably better able to judge (due to lockdown-imposed home schooling) if that expensive education is worthwhile. Some families are financially constrained by the burden of sending their children to private school. It is worth considering whether a good, less prestigious private school is worse than a big-name private school. I believe a good Model C school provides the best of both worlds at a fair price.
In addition, what about the expensive new car or the branded clothes and accessories that you own? Have they really helped your life in lockdown? Will you go back to a high-cost, high-consumption lifestyle or perhaps something more meaningful?
• Warren Ingram CFP® is the co-founder of Galileo Capital. You can follow him on @warreningram