04 May 9 ways to plan for the months ahead
The COVID-19 pandemic has turned the world upside down and we are dealing with unprecedented levels of uncertainty. It seems that we have succeeded in flattening the curve so a battle has been won, but the war on this virus is not yet over. We are yet to experience the full economic impact the lockdown restrictions are having on the economy and even after the lockdown there will be quite some time before full economic activity is restored. The continued fight against the virus will also require ongoing effort from all fronts, which is why you need to consider these 9 ways to plan for the months ahead.
You may have taken some steps to prepare yourself, but it is looking more likely that this situation will continue for quite some time. There is a real possibility that some people may not be in a position to earn an income for the next six months. Being proactive now and mapping your path ahead may well see you through the next wave of uncertainty.
Here are 9 ways to plan for the months ahead.
1. Determine how much you need to sustain your household
Budgeting is of vital importance and not many people have a grip on their expenses. Running the numbers and understanding what the household running costs are will help you tighten your belt and plan for the worst.
2. Communication is important in a time like this
Communicate with your partner and children. If you need to take a pay cut or could be facing retrenchment, find a way to include the family in your plans to see the household through these extreme pressures.
Landlords and banks are facing the same economic challenges and most will be open to discussions about alternative arrangements. Your landlord may even reduce your rent for a period if it means not losing the rental income altogether, and the banks are offering payment holidays. You will need to talk to your bank to determine what they are offering.
3. Review your debit orders
Go through all your debit orders and ditch the ones you do not need. You might be surprised to see how many things you pay for that you do not use. Check your credit card and debit card statements, do you really need subscription for ITunes, DSTV, Netflix and Amazon? As you go through your items, you are bound to pick up a few things that you can put on hold for now to free up your cash flow.
4. Review your investment debit orders
It may be sensible to reallocate debit orders that are allocated to retirement funds to discretionary capital given the restrictions associated with accessing retirement investments. In most cases, investment debit orders are easy to place on hold. Most new age products do not have any penalties associated with cancelling or pausing a debit order. Older style products may have, in which case you should ask your financial advisor for options.
5. Review your insurance debit orders and know your options
The insurers are offering various relief measures to see clients through the COVID-19 pandemic. The three options that are being offered in most cases are:
5.1 Premium holidays
These allow you to pause your cover for a period and save the monthly premiums. After the break you are then able to reinstate your cover without any medical underwriting. This does however mean that you are not insured during the break.
5.2 Reduction of cover
Similar to the option above, you are able to reduce your cover for a period and then reinstate the full cover without medical underwriting.
5.3 Fund cover through benefits
If you have cover with an insurer that has some sort of payback or investment component linked to the cover, then these insurers are allowing clients to pay their premiums from these benefits. Be aware though that there are terms attached.
Check with your specific insurer or ask your advisor as these three options are not dealt with in the same manner.
6. Determine how you can access capital that you may need in the near future
Once you know how much you need to stay afloat for the next 6 months, assess where you can obtain capital to fund your household. If you do not have a savings account ready to fund this, then your next bet is to go through your investments. You may have any of the following:
Unless you are 55 or disabled you cannot access your retirement annuity fund.
Employer retirement fund:
You can only access your employer retirement fund if you have left your employer, as this fund is tied to your employer. If you have resigned, been retrenched, dismissed, or are retiring from your employer, then you can access these funds. Decisions around this requires further consultation so as to have all the information to make an informed decision.
If you previously left an employer and preserved your retirement fund, then you likely have a preservation fund. You are allowed to access this investment once before retirement age and you can either draw out a portion or cash in the investment completely.
The first R25,000 (cumulative during your lifetime) of the lump sum you draw is tax free as well as any accumulated non-deductible retirement fund contributions made by you (the taxpayer) over your working life. The additional amount withdrawn up to R660,000 is taxed at 18%, the next R330,000 is taxed at 27% and the rest at 36%. The lump sum formulas would apply on a cumulative basis over a taxpayer’s lifetime and apply to all lump sum benefits.
It may take a while before you receive the funds, as a tax directive needs to be applied for from SARS.
These investments are flexible and can be accessed when needed. It takes around five business days to redeem the capital.
When you sell a unit (participatory interest) in a unit trust, a capital gain or capital loss will be determined. This gain or loss is calculated as the difference between the original cost (base cost) of your unit trust investment and the market value of your unit trust at the date of sale.
The ‘exempt amount’ of each year’s net capital gain on the sale of any assets – held both locally and offshore – is excluded for the purposes of calculating CGT. (The exempt amount is currently R40,000.)
Once the R40,000 annual exemption has been applied, 40% (80% for legal entities) of the remaining capital gain should be included in your taxable income. It will effectively be taxed at your marginal rate of tax.
Tax-free savings account:
Similar to unit trusts, tax-free savings accounts are flexible and can be accessed when needed. It takes around five business days to redeem the capital and there are no tax consequences that apply.
7. Review your will
Review your will to make sure it meets your objectives. Dying without a valid will could have severe consequences for your family, not to mention the added burden you are placing on them to administer your intestate estate.
8. Check your beneficiaries
Now is a good time to check your beneficiaries to make sure you have nominated the correct individuals. This might also save you tax or executor fees, which means more of your estate is left to your heirs.
9. Realign and understand your investment strategy
If you have earmarked a piece of capital in your investment portfolio to use as your emergency fund, then make sure the capital is allocated to the correct asset class. The recent market decline has recovered somewhat as we stand today, so allocating this portion to a conservative strategy to protect it from any further volatility may be a good idea.
As for your long-term investments, predicting the future rarely turns out well for investors. Managing your emotions and applying sound investment principles may well be your best tool to navigate the current environment.
Use these 9 ways to plan for the months ahead, because as Sir Winston Churchill once said, “Let our advance worrying become advance thinking and planning”.
Michael Maré CFP® FPSA® is a wealth manager at Netto Invest.