By: Tjaart van der Walt, atWORK’s resident CFP®
As if South Africa didn’t have enough on its plate, COVID-19 has reminded us that planning for uncertainty and unexpected obstacles are part and parcel of the financial planning process. This is why it’s high time you re-evaluated some of the key assumptions you make about your clients.
The COVID pandemic has hit many a rosy retirement plan for six. But this doesn’t mean there’s nothing you can do to put your clients’ dreams back on track.
Any advisor worth their salt knows that the overarching key to planning for uncertainty is diversity in asset allocation. But it’s equally important to tweak some of the assumptions we make about inflation rates, investment growth rates, and contribution escalation rates to reflect the times we live in – and the unique circumstances of each client.
The retirement planning system in atWORK already defaults to the ASISA recommendations. This is a great start, but it doesn’t take into account the individual needs and circumstances of your clients. Now more than ever, it is important to go through these numbers with a fine-tooth comb and adjust as needed.
Take a closer look at the default settings…
This is higher than the current inflation rate but is best left alone as the medical inflation rate outstrips the general inflation rate. At times like these, it is always better to err on the side of caution.
Retirement age: 65
As life expectancies soar and the cost of living increases, fewer people are able to retire at the age of 65 (and some of those who can don’t want to). It’s become increasingly common to transition to a second career instead of retiring, for example. This is why it’s vitally important that you discuss each client’s dreams – and post-COVID reality – before setting the retirement age in your Client Relationship Management system.
Increase in retirement contributions: 6.5%
This is based upon the logic that people will receive a 6.5% increase in salary every year… A rather ambitious assumption after the year we’ve been through! The fact of the matter is it may take 10 years for our economy to recover from COVID. That said, there will still be some clients who can keep up with a 6.5% year-on-year increase…Once again, have a conversation and adjust accordingly.
Investment growth rate: 10%
This is a very optimistic assumption. The return on SA equity is more likely to be around 7% (if that) going forward. It’s important to adjust this percentage to something more realistic for each client – burying your head in the sand is never a good retirement strategy.
I can’t stress enough that these assumptions need to be evaluated on a case-by-case basis as no two clients are the same. Luckily atWORK makes it very easy to save these settings to an individual client’s profile – and to quickly and easily change them as required.
Expect the unexpected
COVID has also served as a very stark reminder of the importance of planning for the worst-case scenario. Every family should have an emergency fund that can cover at least 6 months of expenses as well as sufficient life cover to ensure that the death of a loved one is not accompanied by a financial calamity. Here too, atWORK is on your side: Our life cover tool makes it very simple for you to calculate how much life cover your clients need, and to tweak this cover if circumstances change.
The final word
As financial planners, COVID-19 has reminded us of the importance of getting the basics right. And the cornerstone of every decent retirement plan is a comprehensive client management system you trust.