Let me share with you a real life case to illustrate why I believe what I do.
Yesterday a very dear, 73 year old, friend phoned me on the pretext that he wants advice on his short term insurance (I don’t do financial consulting). The short term insurance was not the real issue. His finances, that is what he really wanted to discuss. He is retired and lives on a pension of about 10% per annum of his capital. His medical aid is about 50% of his income and then he holds a part-time job that was downsized earlier this year. With his wife in bad health, his medical aid savings account was depleted by end March.
Amongst other things, he wanted to know if he should sell his house. He is not making ends meet. And to add insult to injury, yesterday morning his car broke down!
This is a very sad story, but not unique at all! When he retired, he used the cash portion of his pension to buy the house where he now lives and the rest to buy the pension. It is sad to see how little capital he really accumulated in an employer subsidised pension fund after a lifetime of working. But accumulating capital is not helping him.
His income is not enough. He cannot do very much to increase his salary. He is already living as frugally as possible. Does he start using his capital to increase his income? How long before he will then have nothing?
Consider the following:
Belonging to the pension fund was compulsory. He did not have any choice, and in the end, although it was not a fortune, it was not a bad thing.
But what would have happened if he bought a rental property 30 years ago? And another property 25 years ago? And another 20 years ago? And another 15 years ago? That is four properties! Well, in the first place, the capital value of the properties would now be worth more than his pension fund! Secondly, I am convinced that the income he derived from the properties would be more than his pension. In other words, with not a lot of effort, he could have doubled his income and wealth.
Obviously I did not tell him this, but I am sharing it with you, so that you can see the method in my madness, but also why I am so mad!
Two other things that I told him that you may benefit from:
- Give power of attorney to your children, so that you don’t end up in a situation where you cannot sign and nobody else can, either.
- Take two of your children to the bank and give them signing power on your bank accounts.
I don’t think one can be too young to do this.