A financial wellness framework for life

By Jannie Leach

Navigating the financial world of debt, savings and investments can be daunting for most people. Finding the balanced between debt and savings can also be stressful, especially when budgets are tight.

Even, or sometimes especially, when someone gets a bonus or inherits some money it is difficult to decide where to invest it. 

Employer-facilitated pension funds, which include risk benefits such death and disability cover, go a long way towards covering some of the most important aspects of someone’s financial wellness journey. However, many smaller businesses don’t offer these benefits, leaving employees to fend for themselves. We have therefore built a framework around the traditional employee benefits offered by large corporates in South Africa, which also incorporates debt and wealth creation. This framework can also be used as a benchmark for financial plans set up by advisors to build trust between the advisor and the client, and quantify value added services.

Mapping financial wellness goals from ‘cradle – to – grave’
The chart below illustrates the various components of the financial wellness journey and how they would possible grow throughout someone’s life time. It has three major components, namely debt, saving for liabilities and wealth creation. Once someone retires these savings and investments need to cover their monthly income and other liabilities(1).

Within each of these components we have a range of financial goals and risks that need to be managed. We have summarised the major goals and risk in the cards below the chart.

A brief summary of these components and goals: 

1. Debt is a necessary evil to acquires goods, services or education - which are essential to progressing in life but are costs which people often can’t cover with exiting savings. These are best paid off as soon as possible. They also tend to require insurance in case they are stolen or damaged.
2. Saving for future liabilities such as retirement, emergencies and/or other personal goals (eg. deposit on a future home) is another essential component of the financial wellness journey. Because these goals require a steady monthly income throughout one’s career it is important to safeguard against the loss of this income due to retrenchment, death or disability.
3. Building wealth or ‘just investing’ is investing to grow the assets that you may or may not use within your lifetime. These assets may include investments such as unit trusts, shares in companies and property. The proceeds of these investments may be structured or located so that they can be accessed in the investor’s home country (South Africa) or abroad. The important risks that need to be managed with these investments mainly include risks associated to managing and preserving the wealth, for example concentration risks (home country, single shares, property), liquidity risks (access to capital) and political risk. It’s also important to have appropriate tax structuring for investment-related taxes and estate duties.
4. The funding of retirement income is one of the major liabilities an investor saves for throughout their career. This retirement income can be withdrawn from annuities, such as life annuities or living annuities. Income can also be supplemented from other savings, or from income provided from properties or dividends from shares in a business.

A simple investment strategy
Once the framework is in in place one can develop a simple implementation strategy using liquid savings and investments such as unit trusts and bank savings deposits. We will make use of three savings and investment strategies namely; a liquid savings account that pays interest, a South African Balanced fund which is compliant with Regulation 28 of the Pension Funds Act, and a Global Balanced fund with no home bias(2).

The two balanced funds target a return range of 4% to 6% above the relevant inflation after fees and taxes. The Nedgroup Investments Core Diversified Fund and the Nedgroup Investments Core Global Feeder and UCITS Funds would be the benchmarks for the SA and Global Balanced funds respectively, as they offer broad diversification, low fees and tax efficiency. 


Enhancements and seeking further advice
One could potentially enhance the investment strategy above by increasing the risk exposure - for example, by using the Nedgroup Investments Core Guarded Fund as the liquidity savings option and the Nedgroup Investments Core Accelerated Fund for saving for retirement.

It may also be useful to speak to a financial advisor for further assistance on estate, risk and tax planning among many other needs. Some advisors offer these services for fixed rand fees which are not tied to the investments.

The framework and implementation strategy above may simplify the financial wellness journey, but it is meaningless without investors taking action and applying it within their own financial lives. Starting with one goal at a time may be the most effective way to overcome this daunting task.

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(1) See Why a written investment plan is a good idea for more details around the required savings for retirements

(2) See The home bias dilemma ? how do you determine the right level of offshore exposure?