Are you prepared for life’s knocks?

Illustration: Colin Daniel

Illustration: Colin Daniel

Published Oct 11, 2014

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Eight in 10 South Africans over the age of 50 say they have experienced at least one major unexpected life event – typically, one that was a financial shock. And four in 10 find themselves supporting someone they did not expect to support, a survey by Sanlam of 600 over-50s shows.

The respondents, who have a household income of R14 000 a month or more, were not financially prepared for these eventualities, and 82 percent of them say they had regrets, wishing they had done more to prepare for the way in which their lives have turned out.

The survey highlights the impact of two well-known facts: we, as a nation, save too little and we have way too little life and disability cover.

Household savings as a percentage of the country’s gross domestic product are extremely low, at 1.7 percent, and the recent Old Mutual Savings Monitor found that 38 percent of its respondents are saving less than they did a year ago, while more low-income earners, who are most vulnerable to financial shocks and the rising cost of living, are saving less than they did a year ago.

The Savings Monitor also found that the rate of saving – at 14 percent of household income – was the lowest in six years.

Meanwhile, the most recent surveys of life and disability cover by True South Actuaries & Consultants found that South Africans are underinsured by 62 percent of the cover they need to meet their needs on death and by 60 percent for disability.

Sanlam’s survey of life surprises shows the real impact of the failure to save and have enough insurance. Unexpected events that threw households off-track – and some households experienced more than one – were social or family-related more than 60 percent of the time, were financially related 40.9 percent of the time, and were health-related 36.6 percent of the time.

Social or family-related surprises included a death in the family, divorce, an unplanned pregnancy, a special-needs child, being a victim of crime, a family trauma – such as a missing child or a family feud – and even family emigration.

Financial surprises included loss of income or retrenchment, loss of savings or retirement savings, having to take financial responsibility for a parent, closure of a business and starting a business.

More than 90 percent of the participants who had experienced the closure of their own business regarded the financial impact as “devastating”. The survey found that 65.6 percent of respondents whose businesses had failed were not financially prepared for this event. In addition, they suffered emotionally.

The survey found that respondents viewed the loss of their savings or retirement savings as the most financially devastating event they had experienced, with the greatest emotional impact on them.

When the survey respondents were asked to mention a single life event that had the biggest emotional impact on them, most cited the death of a family member.

Health-related surprises were dread diseases or other illnesses, disabilities or accidents.

Of the respondents who are supporting someone they did not expect to have to support, 44 percent are supporting grandchildren, 43.6 percent are supporting children, 20.2 percent extended family members, 12.8 percent their parents, and 11.1 percent a spouse. The results show evidence among over 50-year-olds of what is known as the sandwich generation who are supporting children as well as parents.

The survey found that the incidence of people supporting someone they did not expect to support is higher among those in their 50s than among those who are older.

More than 50 percent of black respondents are supporting someone they did not expect to support, while the incidence is one in three among white respondents.

On a lighter note, some people had positive surprises, such as receiving an inheritance, having a gifted child, landing a dream job or experiencing a great holiday.

WHAT YOU CAN DO TO PROTECT YOU AND YOUR FAMILY

Life’s curveballs may be unpredictable, but this doesn’t mean you can’t prepare for them.

The key lessons from the Sanlam survey of life’s surprises are that, to deal with the shocks that come your way, you need an emergency fund equal to between three and six times your take-home monthly salary, a robust financial plan, appropriate life cover and an up-to-date will, Karin Muller, the head of growth market solutions at Sanlam, says.

Families need to have difficult conversations about what they will do if a family member died suddenly or fell seriously ill or went missing, she says.

Having adequate life assurance and income protection in the event of disability will ensure that, when you do have to support a family member, you will receive some financial help from the policy payout.

Some of the survey respondents who lost their savings or retirement savings say the cause of this had been losing their jobs or becoming ill.

If you can afford it, Muller advises that you take out dread disease cover, which will offer some protection if you contract a serious illness. A gap-cover policy, in addition to medical scheme cover, can also offer you some protection from the costs of a major illness or an accident, she says.

Retrenchment cover is typically very expensive. You may be offered credit life cover for your debt repayments that includes cover in the event of your being retrenched, but this is limited to the amount you owe and is typically for a limited time.

An emergency fund will also be a great help if you lose your job.

If you start your own business, you may do well to bear in mind that, according to Jannie Rossouw, the head of Sanlam’s business market, business failure in South Africa is very high. The Department of Trade and Industry’s statistics for last year showed that five out of seven new small businesses fail in the first year.

Rossouw says the main reasons for small business failures are a lack of management skills, insufficient cash flow, poor planning, over-expansion, poor marketing and inappropriate location. In addition, he says, there may be some factors beyond your control, such as the rapid development of the digital age.

Rossouw says the emotional fall-out of a failed business can also be overwhelming because entrepreneurs invest so much in a business, and its closure is like the death of a loved one. It affects the business owner’s professional and personal sense of self-worth and can lead to depression, stress-related illness and family breakdown, Rossouw says.

Rossouw says although you cannot always safeguard a business from closure, you can protect your own estate against such failure.

“With the assistance of a professional financial adviser, you can draw up a financial plan which could ensure you are adequately prepared for unexpected events that could otherwise have severe financial complications for you, your business and your family,” Rossouw says.

He says you need to insure both your business and personal risks to avoid scenarios where creditors can lay claim to your assets.

“For example, if you sign surety for finance, you can be held personally liable for the funds, and need to make sure that the necessary contingency cover is in place to prevent a financial meltdown should you become disabled and unable to operate your business and repay the debt.”

As a business owner, you need to understand and manage all aspects relating to your financial situation – from insuring the business, to insuring key people in the business and insuring your life and assets.

“It is a good idea not to put all your eggs in one basket – that is, your business. Investing in a retirement annuity, for example, will ensure you will have funds available at retirement, since creditors will not be able to access this in the event of your business being forced to close.”

Rossouw says many business owners believe their business is their retirement plan, but fail to consider whether their business will realise the value they expect it to when they retire and are no longer the key person.

Rossouw says if you manage your personal finances carefully, it will mean you won’t have to worry about the debts of a failed business while you get back on track.

Divorce is another financially and emotionally devastating event – ranked fourth by the participants in the Sanlam survey for its financial impact.

Divorcees need to consider not only the short-term impact of divorce, such as having to set up separate homes and care for children as single parents, but also longer-term issues, such as how splitting your retirement savings will affect the potential for your savings to grow.

Nicky Gous, a financial planner at Citadel, says women can lose up to 77 percent of their net worth after divorce.

You need to assess your situation and formulate a strategy, which may require some sacrifices initially, and stick to it. In time, with proper planning, you can re-establish yourself financially, Gous says.

The need for child support and income to finance your new lifestyle will be the immediate challenges, but these can be planned for and managed effectively if you stick to your strategy, she says.

Both Muller and Gous say you should not forget to update your will once you’re divorced, as well as review the beneficiary nominations on any policies and investments. Ensure that you and your soon-to-be former spouse are in agreement on who will become the guardian of your children if you both die while they are still minors.

It is also prudent to consider the establishment of a testamentary trust for children if either spouse dies before the children are in a position to inherit or manage assets.

Review your death and disability cover, because your needs will change after divorce. This is particularly important if minors are involved, because the surviving spouse needs to be sure that the maintenance obligation will be fulfilled under all conditions.

Almost 30 percent of the participants in the Sanlam survey say they expect to outlive their partners, and more than 50 percent of these people expect to live at least five years longer than their partner.

Muller says to deal with one partner outliving the other by a long time, you both need to plan adequately to make sure there is sufficient income for the surviving partner and that this income increases with inflation.

The survey found that less than one in three participants have received financial advice. Muller says you shouldn’t under-estimate the skill and expertise needed to plan finances effectively.

Financial advisers are required to be qualified, to give you a complete view of your short-, medium- and long-term financial outlook and prepare you financially for life’s knocks.

Advisers can help you to think through all the implications for your finances of an event such as divorce.

WORDS OF WISDOM

Participants of the Sanlam survey were asked to write a letter they would have sent to themselves at the age of 20 if they could have. Among other things, they wrote:

“Save more and spend less.”

“Have money for rainy days.”

“Always have a back-up plan. Don’t buy stuff to impress others.”

“Don’t make debt; it will land you in big trouble.”

“Start a savings plan with your first pay-cheque.”

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