Discipline and a dose of calculated risk pay off
Many people "invest" more heavily in lifestyle assets - large houses, flashy cars and holiday homes - than in growth assets, such as shares. Those who invest in the latter do so in the hopes of living off the growth of their investments one day.
Having made this distinction early in life, 37-year-old Nicole has a balance sheet in excess of R5-million.
"She's the kind of investor a financial planner appreciates," says Craig Turton, the MD of Chartered Financial Planning.
Nicole, who is single and holds a management position in a media business, has been Turton's client for 15 years.
He says that from the time she started working, earning R9000 a month, Nicole set her "lifestyle ceiling" - the level of comfort she required - and, once she had reached this level, she began putting her money in investments rather than lifestyle assets.
Turton attributes his client's success to:
• Having the same employer for 14 years. Nicole has maintained her pension contributions and, should she resign, will transfer her savings to a preservation fund or her new employer's fund, so they remain a retirement asset. She has R732000 in her pension fund;
• Saving with a unit trust, which she has done since her first pay cheque. Her fund value is R563000;
• Living in one property since she was 23. She bought it for R800000, and it's now worth R1.65-million. She paid it off over 14 years; and
• Buying a rental property three years ago. She bought it for R750000 and it is now worth R960000. The rental yields R7000 a month, more than covering the bond.
Nicole has used all her surplus cash to pay down the bond to R344000. Turton has advised against settling the bond in full because this will affect her taxable income, as there would be no interest to offset the income. "Sometimes having a bond on a rental property is a good idea due to tax." Nicole aims to save a lump sum to transfer offshore, one area in which she is lacking.
She has accumulated R747000 in share options offered by her employer. She will have to realise these next year and will pay some capital gains tax on the proceeds.
"Once she has the funds, we will add a portion to her new offshore investment and a portion to a new well-diversified share portfolio," Turton says.
Nicole has contributed R344000 to a retirement annuity but stopped these contributions four years ago because she wasn't getting the tax deduction on the premium, Turton says. "Even though she can now contribute again and get the deduction, we decided rather to focus on offshore and creating more liquidity in her portfolio."
Nicole's share portfolio and properties could be regarded as risky, he says. "But over the past 14 years, the risk has paid off. She has invested in the most risky fund she can with her pension, due to her age and with regulation 28 in mind. This is probably regarded as a moderate risk. Her RA is invested the same way. And her emergency fund, which has R110000 in it, is in a cash account she could draw on at any time.
"Her unit trusts are invested in a strategy targeting 6% above inflation over a seven-year period. Since inception, this investment has performed according to its target, even though in the last two years it has performed below inflation."
Nicole is comfortable with this short-term underperformance, knowing that markets turn and returns will improve, he says.
"At age 65, her retirement assets will have a value of just over R10-million in today's terms. This will offer her R50000 a month - her salary is R47000 a month before tax - with little risk of the capital depreciating."
Turton says Nicole's success shows the value of remaining invested, keeping to an investment strategy and understanding the value of diversity and tax incentives.