You may have heard of a return on an investment, but have you heard of an investment measure called the internal rate of return (IRR)? The return on investment (ROI) – sometimes called the rate of return (ROR) – is the percentage by which an investment has increased or decreased over a certain period. By contrast, the IRR measures the actual return on an investor’s money in a portfolio. The IRR calculation takes into account all fees, the investment term, and additional investments and withdrawals, and calculates the growth of the investment in a meaningful way. This enables investors to determine whether their portfolio is on track to achieve the return they need to maintain their standard of living. The IRR calculation shows a portfolio’s return on an annualised (per year) basis. If, for example, you had R100 on January 1 and R110 on December 31, and you made no deposits or withdrawals between those two dates, your IRR would be 10% for the period. If, however, you made monthly deposits of R1 (or R12 in total) and your portfolio was worth R110 on December 31, you would have a negative IRR of –1.9%. After investing a total of R112, you would have less money (R110) than you invested. If, on the other hand, you withdrew R1 every month and you had R110 at the end of the year, your IRR would be 23.2%. Your cash flow during the year would have been R12, and you would have ended the year with an additional R10 in the investment. The IRR calculation is also referred to as the money-weighted return calculation. This is different from a traditional time-weighted return where we exclude any client-generated cash flow in and out of the portfolio and look only at the initial value (R100) and the final value (R110) and get a return of 10%, which ignores how much money had been added or withdrawn over the period. Although these are very simple examples, they illustrate the importance of knowing a portfolio’s IRR. In reality, additional variables, such as fees, are taken into account, thereby providing a more realistic picture of your return. Knowing your portfolio’s IRR is important, because it enables you to monitor whether you are progressing towards achieving your financial goals. It indicates the actual return, including cash flows in and out of your portfolio, over the period. By comparing the IRR to your required rate of return – the rate that your portfolio needs to achieve in order to meet your lifestyle requirements, for example, inflation plus 2% – you will be able to assess your progress towards your goal. Interestingly, two people may be invested in the same portfolio but have a different IRR, because their deposit and withdrawal patterns are different. Let’s say, for example, that the market increases 10% over the year, but it first goes through a valley, falling 5% in the middle of the year. If Investor A added to her portfolio while the market was in the valley, whereas Investor B made a withdrawal, it means that Investor A bought at a discount, while Investor B realised a loss. In this example the portfolios’ overall performance was the same, but their individual IRRs will be different. If, during a financial planning exercise, calculations show that you need an annual return of 3% above inflation to achieve your lifestyle objectives, the calculation assumes that, as long as the money is invested in your portfolio, it is earning 3% above inflation. The IRR calculation is the most appropriate formula for checking whether you are actually earning what your financial plan says you need. To get advise on investment options with a track record of good returns, please contact Kevin or Thato, email: invest@daberistic.com tel no: (011 658-1333) Source: Business day live
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There are a huge variety of offshore investment opportunities that enable you to grow your wealth using a vehicle that suits your income and lifestyle. In the event of your passing, these investments are a legacy that will continue to serve your family. However, in order for you and your family to make the most of your investment, you need to make a few responsible decisions from the outset. When selecting your offshore investment, you can choose between listed or unlisted equities, fixed income, property or cash investments. It all depends on your risk appetite. For example, listed equities are always a good option because they are very liquid and priced daily, while fixed income investments include bonds issued by the government, corporates or banks as well as money market products (very short-term debt instruments). Before investing, it is therefore important to research and understand the different kinds of offshore investments and what they would mean for you. One important consideration is the tax implications of your investment. Offshore property investments, for example, may have certain tax conditions in the country you are investing in. For many investments, tax is only applied in the country in which the money and its growth resides (source based tax regime). However, it is important to understand the law of different countries to avoid being taxed twice. Tax on offshore assets becomes a critical consideration in the event of your passing, as your loved ones may wish to bring the money back into the country as part of your local estate. Remove any uncertainty on the matter by getting professional advice on your portfolio. A knowledgeable tax consultant will be able to assist you in making your offshore investment and your overall estate more tax efficient. This does not mean avoiding tax, but rather ensuring that your investments are structured in the most tax efficient way. The biggest risk to your offshore investment after your demise - is a lack of planning. Unfortunately, when it comes to estate planning, people don’t see their own mortality, which means that their affairs are often not in order or kept up to date. Millions of investments often go unclaimed because the investor has not planned for the worst-case scenario. There is no need for this to happen to you, as future-proofing your offshore investments is very simple. All you need to do is become diligent about documentation from the moment you invest offshore. Record and save every correspondence and detail about your investment in one place. Document what the investment is and provide clear contact details on who needs to be contacted in the event of your death. Many of us are not good at administration. If you know this isn’t your strong point, simplify things further by hiring someone to do it for you! Commit to the process and remember that it doesn’t have to be expensive or complicated – anybody can do it themselves under the guidance of the Master of the Supreme Court. When it comes to securing your offshore investment for the future, the best advice would be to imagine what it would be like if it were you consolidating your estate. What information would you want to be in the envelope? What processes would you wish were in place? When planned correctly, an offshore investment is a powerful vehicle to create lasting wealth, even when you pass away. With some simple planning, your loved ones will have an ongoing, sustainable legacy. Source: Personal Finance Retirees advised to pick both a living and a guaranteed annuity for peace of mind. Your best bet for a sustainable retirement income is to combine a good value-guaranteed annuity with a well-managed living annuity, leading financial advisers agreed at a recent Financial Planning Institute (FPI) conference. A guaranteed annuity offered you "insurance" against the risks of outliving your retirement capital, but there were a number of things seriously wrong with these pensions, advisers said. Every member of a pension fund, retirement annuity and, in the future, possibly a provident fund, must at retirement use two-thirds of their savings in these funds to buy an annuity — a sum of money or pension paid to someone regularly. Most South African retirees choose to generate a pension using an investment-linked living annuity in which they must decide how to invest their lump sum and then what level of income to draw from the investments as a pension. But these annuities involve complex decisions on how the investments will perform and the level of income that can be withdrawn, and provide no guarantee that the income level can be sustained for the rest of your life. Only about 20% of retirees choose guaranteed annuities that provide a pension for as long as you, or if you choose, you or your spouse, live. These annuities can provide a level income, a fixed increase or inflation-linked annual increase, or an increase based on a share of the returns on the underlying investments called a with-profits annuity. The 2015 winner of the financial planner of the year award, Wouter Fourie of Ascor Independent Wealth Managers, told the FPI's recent Retirement and Investment Conference that "level, fixed-increase and inflation-linked annuities have traditionally not offered good value — they are too expensive for what you get". With-profit annuities offered better value, he said. "We need to challenge the life companies. I think they are making a killing out of these annuities," Fourie said, because in his view life companies paid too little income from the investment. If you chose to receive an escalating income from a guaranteed annuity, the income drawn from your capital could be lower than the yield you could earn from investing in a government bond, he said. Life assurers invest mostly in bonds to provide you with the income they pay you when you take out a guaranteed annuity. The income offered on guaranteed annuities should therefore increase or decrease in line with bond yields, but Craig Gradidge, an independent financial planner with Gradidge Mahura Investments, said guaranteed annuity rates did not appear to have increased despite increasing bond yields. Andrew Davison, the head of implemented consulting at Old Mutual Corporate Consultants, said it was not true that a bond could deliver a superior return. You would need a 35-year bond to ensure an income from age 65 to 100 - the age you need to plan for because people were now living for longer, he said. A guaranteed annuity can deliver a higher pension than the interest and capital repayments you could get from a 35-year bond because annuities pool investors' capital and the annuity payments are based on the average life expectancy of the group, which will be lower than 100. Davison said the pricing of guaranteed annuities should be more transparent, but retirees should not underestimate the benefit of the insurance such policies provided against the high risk of outliving one's savings. "We typically insure our cars and homes, but at retirement most of us choose to use a living annuity without any insurance against a key unknown factor — how long you are going to live," he said. Old Mutual tested the ability of a R1-million living annuity to sustain an initial income level of 6.5% of the capital, increasing by inflation each year. It tested 75 annuities with starting dates six months apart from January 1951. The annuities were invested in balanced portfolios of equities, bonds and cash and the average real (after inflation) return was 5.5% a year over the entire period. However, the sequence in which good and bad returns were earned, combined with the consistent income withdrawal, resulted in 42 of the 75 annuities failing to sustain the required income, Davison said. The shortest period over which an annuity supported the required income was just 13 years. Fourie said the best option was to use both a living and a guaranteed annuity, but annuity providers needed to do more to enable the combination to work for you. You should be able to initially split your capital between a living and guaranteed annuity and then to slowly migrate capital from the living annuity to the guaranteed annuity, he said. Life companies should be able to offer guarantees on living annuities, and the administration fees should not be charged as a percentage of the amount invested, Fourie said. Finally, you should be allowed to reduce your withdrawal from a living annuity to zero, he said — currently you must withdraw at least 2.5%. This would enable people to use a guaranteed annuity for their basic income needs and to withdraw from a living annuity only when investment markets favoured this, or when they needed to access funds, for example for medical expenses. If you would like to find out more information about Retirement Annuity, please contact Kevin or Thato, email: invest@daberistic.com tel no: (011 658-1333) Source: BD Live Findings from the 2016 Sanlam BENCHMARK Survey show that many retirees’ income – even in the affluent market – is not keeping pace with inflation, leading to a reduction in the buying power of their post-retirement incomes. This points to the necessity of supplementing the savings you have in your employer’s pension and/or provident fund. Supplementing your retirement savings with a retirement annuity A retirement annuity, or RA, is an ideal vehicle for this purpose. Investors can receive tax benefits by investing up to 27.5% of the higher of their taxable income or remuneration into retirement savings products (RAs, pension and/or provident funds). The tax-deductible amount is capped at R350 000 per year. Re-investing the tax saving can significantly increase the final value of your investment. In addition, while saving in an RA, you don’t pay tax on any interest or dividends, and no capital gains tax is applicable on the growth in the investment. Depending on the investment platform, investors can select from a wide choice of underlying investments in their RA, including risk-profiled investment funds, local or foreign funds, actively managed or passive index-tracking funds, single manager or multi-manager funds, as well as an individual share portfolio or exchange traded funds. The maximum exposure to asset classes, however, is governed by Regulation 28 of the Pension Funds Act. Current limits include a 75% maximum exposure to equities, 25% to property and 25% to offshore investments, although an extra 5% can be invested in Africa. Investors have until the end of February each year to take advantage of the tax benefits for that particular tax year, by adding a lump sum to their RAs. Tax-free Savings Accounts – a vital part of any investment portfolio The benefits of Tax-free Savings Accounts (TFSAs) are well-known by now – no tax on interest or dividends received, and no capital gains tax or tax on funds withdrawn. Making a TFSA work for you to your best advantage, and within the context of your overall investment portfolio, requires some consideration and professional financial advice in this regard is invaluable. It will take investors 15 years to reach the maximum lifetime contribution limit of R500 000 to their TFSA. While you can access the money at any time, any amount withdrawn will be regarded as a further contribution (towards your lifetime contribution limit) when re-invested in the TFSA. Given this negative impact of withdrawals on your contribution limit, your TFSA should be viewed as more of a long-term investment; there are other investment vehicles more suited to short-term savings or emergency funds. Other important considerations involve weighing up contributions into a TFSA versus a regular investment plan, as well as into a TFSA versus a retirement annuity. TFSA vs Investment Plan If an investor is currently investing, for example, R5 000 a month into a discretionary savings plan, it will make financial sense to split the investment, i.e. invest R2 500 into the discretionary savings plan and R2 500 into a tax-free savings plan in order to utilise the tax benefits of the TFSA. TFSA vs Retirement Annuity Weighing up contributions to a retirement annuity (RA) versus a tax-free savings account is a slightly more complex decision. Together with your adviser, you need to look at the advantages and disadvantages from a tax perspective. While for both options the growth within the product is free of dividends tax, income tax on interest and capital gains tax, only contributions into an RA are tax-deductible. The TFSA will, however, offer more flexibility in terms of access to money, whereas RA funds can only be accessed from age 55 upwards. Lump sum withdrawals from RAs are only tax free up to certain limits, while there is no tax when withdrawing from a TFSA. However, it needn’t necessarily be an ‘either/or’ choice. Using the two in combination can deliver superior results. Investing on behalf of your children Parents can also open tax-free savings plans for their children, i.e. a family of four, with two children, can save up to R120 000 tax free (in the 2016 tax year). From 1 March 2017, the limit increases to R33 000 per individual per year, therefore a family of four can invest up to R132 000 per year. This is an ideal way to save for a child’s education and can also help to cultivate a savings ethic from a young age. Note that when investing on behalf of your children or transferring an investment to them, donations tax of 20% of the amount donated is payable. Investors, however, have an annual donations tax exemption of R100 000. Investors are encouraged to consult with a qualified financial adviser to ensure their investment portfolio is in line with their personal circumstances and risk profile. To get a quote for a Retirement Annuity or Tax-Free savings account, please contact Kevin or Thato, email: invest@daberistic.com tel no: (011 658-1333) Written by: Roenica Tyson Source: Sanlam The SASI (South African Savings Institute) has a initiative annually in July called annual Savings Month which focuses on encouraging alternative savings solutions. This year a panel of industry experts discussed developing alternative mechanisms to help South African consumers, already under pressure and over-indebted, to save.
Below is a list of tips from SASI to help you save:
To get Financial Planning advise to assist in ways you on how to save and invest, please contact Kevin, email: invest@daberistic.com tel no: (011 658-1333) Source: Saving Institute If you’ve been diagnosed with a disease lasting more than three months which is a chronic condition and you then need ongoing treatment. If the medication falls within your medical aid's chronic disease list, you then will be able to use your benefit for chronic medication. Below is a few question answered from the Council of Medical schemes which regulates medical schemes. Is my medical scheme obliged by law to provide cover for certain medical conditions? Yes, these are known as Prescribed Minimum Benefits (PMBs). They were introduced into the Medical Schemes Act to ensure that beneficiaries of medical schemes would not run out of benefits for certain conditions and find themselves forced to go to State hospitals for treatment. These PMBs cover a wide range of ±270 conditions, such as meningitis, various cancers, menopausal management, cardiac treatment and many others, including medical emergencies. However, take note that certain limitations could apply, such as the use of a Designated Service Provider and specified treatment standards. PMB diagnosis, treatment and care are not limited to hospitals. Treatment can be received wherever it is most appropriate, including a clinic, outpatient setting or even at home. Always check your benefits with your medical scheme and make sure you have the scheme's rules at your disposal. Is it true that schemes now also have to provide chronic medication? Yes, the list of PMBs includes 25 common chronic diseases in the Chronic Disease List (CDL) and other chronic conditions within the ±270 Diagnosis Treatment Pair (DTP) section. Medical schemes have to provide cover for the diagnosis, treatment and care of these diseases. However, you should remember that a medical scheme does not have to pay for diagnostic tests that establish that you are not suffering from a PMB condition. The treatment algorithms (guidelines for appropriate treatment) for each of the CDL chronic conditions have been published in the Government Gazette while the chronic diseases in the DTP section are guided by the public sector protocols. This assures you of good quality treatment and reassures your medical scheme that it will not have to pay for unnecessary treatment. Your doctor should know and understand most of the guidelines so that he or she can help you get the treatment you need for any of these conditions without incurring costs that your scheme does not cover. Why are some chronic illnesses covered and some not? The diseases that have been chosen are the most common, they are life-threatening, and are those for which cost-effective treatment would sustain and improve the quality of the member's life. Does my scheme need to do anything to ensure that the Designated Service Provider can treat me? The Council for Medical Schemes has been advising medical schemes to enter into contracts with any DSP they choose, especially State hospitals, to ensure that these providers can supply the necessary services. Many State hospitals have set up separate wards to serve beneficiaries whose treatment and hospital stay is paid for by their medical scheme and to whom the hospital can then afford to provide better service. Other schemes have made arrangements with private hospital and certain retail pharmacies to treat their beneficiaries. Can I be refused cover for the chronic conditions if I do not get authorisation or have certain tests? Yes, medical schemes can make a benefit conditional on you obtaining pre-authorisation or joining a benefit management programme. These programmes are aimed at educating members about the nature of their disease and equipping them to manage it in a way that keeps them as healthy as possible. For example, many schemes offer treatment through groups that manage diseases such as diabetes, and are equipped to give the medication and monitor that disease. To register for your Chronic medication please contact Namhla in our Health Department email health@daberistic.com , tel (011)658 -1333 Source: Council for Medical Schemes Robert Kiyosaki multimillioanire and author of "Rich Dad, poor dad" wrote this blog about The mistake millenial parents mistake regarding their children and finance. This is what he had to say; More and more there is an interesting trend: parents paying down the cost of their children’s debt. Whether it be student loans, home down payments, or living at home because of credit card debt, parents of millennials are footing the bill—or at least significantly helping pay down—for their kids’ big debt costs. On one level, I can understand this impulse. Parents naturally love their children and want to help them start life on the right foot. And the high levels of debt that most young people have, along with low salaries and poor job prospects, make it very tough for them to get ahead. But I believe that footing the bill for your kids actually hurts them more than it helps them. The pain of financial failure My first business sold nylon and Velcro surfer wallets. We worked out licensing deals with famous rock bands and put their logos on the wallets. The sold like hotcakes and the company grew very quickly. But I made a huge mistake. My attorney told me that I should patent my idea. When I heard that it would cost $10,000 to do so, I said no way. Soon another company came along and copied my idea, cutting into my market share. On top of that, I had a number of distributors who owed me money but were not paying. Soon my company was in dire straits and I decided to meet with my rich dad. What I hoped to get out of the meeting with rich dad and what I got were two very different things. My hope was that rich dad would show me a path forward to save my business—and maybe even to offer some financial support. Instead, rich dad looked over my financials, stared me in the eyes, and said, “Your company has terminal financial cancer. You have grossly mismanaged this business and it can’t be saved.” In my arrogance, I tried to convince him that he was wrong about my business, but deep down I knew he was right. Eventually I had to liquidate my business. In the process, I went $1 million in debt. The pain of this financial failure was very acute. Digging out of debt Soon after that, I met Kim. I didn’t think this beautiful woman would want to be with a guy whose business just failed and was $1 million in debt, but we fell in love and she stuck with me. Together, we worked hard to build a new business centered around financial education—at times living in our car or on friend’s couches to make ends meet. We both knew we didn’t want to simply go and get a good job. We wanted to build a company and we found our purpose in life. That clarity of vision allowed us to make the many sacrifices we needed in order to achieve our goal. Eventually, Kim and I paid of the $1 million in debt and built a successful business. Along the way we learned invaluable lessons not just about money but also about ourselves. The pain was necessary The easy path for rich dad would have been to placate me, sugar coat his assessment of my business, or even to give me a loan to see if I could turn it around. Any of those options would have done me a huge disservice. Ultimately, it was rich dad’s hard words—and the hard years that came after them—that led to my success later in life. I can confidently say that had it not been for the hard truth that rich dad gave me, I would not be where I am today. The financial pain was necessary for me, and it’s necessary for your kids. How to really help The easy way out for parents is to pay for their kids’ expenses and debt. The hard way forward is to watch them struggle financially while working with them to build their financial intelligence. Rather than foot the bill, I encourage all parents to invest in their children’s financial education. Don’t pay for the debt, but do take them to a seminar that can change their perspective on money and the world. Spend time rather than cash to go over their financial statements and coach them on how to make better financial decisions. And be there when they need a shoulder to cry on. Only by owning their own financial future will our children grow to prosper and thrive in a world where it is increasingly hard to financially survive. Where to start The good news is we have many resources to help you do this. Start with going over the new rules of money: Money is knowledge Learn how to use debt Learn how to control cash flow Prepare for bad times and you will only know good times The need for speed Learn the language of money Life is a team sport; choose your team carefully Since money is worth less and less, learn how to print your own From there, I encourage you to read and study Rich Dad Poor Dad, which has just been released in a new and updated edition, and take the time to play CASHFLOW together, which was created to put the rich dad principles into real world simulation. You can play online for free. Once these foundations of financial intelligence are in place, you can then begin advanced work with a coach, as well as attend specialized workshops and seminars. And best of all, you can formulate a plan to even invest together. Kim and I started the Rich Dad Company many years ago precisely because we want to see you and your kids enjoy the financial success that comes from the lessons handed down to us and learned along the way. Why not start today? To get get assistance for your financial planning for your whole family, please contact Kevin or Thato in our Invest Department, email invest@daberistic.com, tel (011)658-1333 Written by: Robert Kiyosaki Source: Richdad |
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