Penguin Random House has shared an excerpt from To 100 & Beyond: How to Make Your Money Last as Long as You Do by Wynand Gouws.

The number of people living into their late nineties and early hundreds is growing by the day. The notion that you have to retire at 65 is becoming outdated and, more importantly, impractical and even financially hazardous. However, the question remains: How do you provide for yourself should you live to a ripe old age, as is very likely?

Irrespective of where you currently are in life – starting out in your career, approaching retirement, or already retired – living longer fundamentally challenges the traditional mindset of a retirement date being a line drawn in the sand.

To 100 & Beyond provides sound, tried-and-tested advice on how to approach living a longer, financially secure life, including how to invest wisely, generate alternative income streams, handle your tax affairs and plan your estate. Practical, real-life examples make this book an easy-to-understand, highly accessible tool that can help you to achieve financial freedom so that you, too, can live your best life now and into retirement.

Wynand Gouws’s passion is using his extensive experience in investments and retirement planning to coach clients through the maze of complexity and jargon in the financial-planning industry and help them realise their financial aspirations. He has more than 30 years’ experience in the industry and, in addition to being a Certified Financial Planner (CFP®), he also holds an MBA and a post-graduate diploma in Future Studies. He regularly comments on the financial-services industry and has been invited to participate in and write for the print, radio and TV media, as well as a range of online publications.

Read the excerpt:

FINANCIAL STUFF I WISH MY DAD HAD TOLD ME

To live a financially secure life to 100, you need a sound financial framework. There is no getting around the basics of financial planning and sound investment principles. In the next few chapters, we look at the critical elements of sound financial planning. But before we delve into the details of your financial plan, let’s consider the principles that can help you thrive financially up to the age of 100.

Even though these principles are timeless, the sooner you start implementing them, the bigger the difference they will make in the long run.

A PART OF WHAT YOU EARN IS YOURS TO KEEP

One of the most profound financial lessons I have learnt comes from George Clason’s The Richest Man in Babylon, a 1926 book that shares financial advice through a collection of parables set 8 000 years ago in ancient Babylon. The book remains in print almost a century after these parables were first published, and it is worth reading.

If you remember only one thing from the whole book, this is its most important lesson: Before you pay for anything else, you need to decide what is yours to keep, and invest it to let it grow. When you start to put away small amounts of money every month, you will be earning interest on it. In this way, you will make your rands multiply and benefit from compound interest.

The collapse of the Spanish empire in the seventeenth century is largely attributed to rising and uncontrolled inflation. More recently, there have been instances of inflation spiralling completely out of control, as in Hungary in 1946, where the prices of goods doubled every 15 hours, and in Zimbabwe in 2009, where the prices of goods doubled every day. One of the most recent examples of hyperinflation is Venezuela, where the prices of goods increased by 4.65% per day in 2018.

The worst enemy of investment is inflation. Inflation is often regarded as the proverbial thief in the night, or a cancer that slowly drains the life out of you without you noticing it. By the time you realise that inflation has caught up with you, there may be no remedy.

But sadly, it can kill your financial plans and dreams with ease. Inflation reduces the buying power of money and leads to increased price levels over time. Everyone will recall that even just a few years ago, petrol, electricity, cars and groceries were far more affordable than they are today!

If you do not protect and grow the value of your money to keep pace with inflation, the value of your investment will reduce over time. At an inflation rate of 6%, the buying power of your money will halve in 12 years’ time. This means that in 12 years’ time, R10 000 will only be able to buy goods to the value of R5 000 in today’s terms. The rule of 72 (72 divided by the inflation rate) helps us determine how long it will take for the value of our money to halve. At 6%, it will take 12 years for our buying power to halve (72 divided by 6).

The main challenge for investors is that the prices of goods and services rise at different rates of inflation. As inflation rates change, we may be unable to afford our current standard of living. So, as you go from being a single person living in a small apartment to becoming married, having children and living in a house, inflation rates can change dramatically. Combine personal changes with macroeconomic changes in the world (such as oil prices), changes within your country (education, medical and food costs) and your neighbourhood (municipal and security costs), and things can get out of control pretty quickly.

Cost of goods and inflation

Let’s look at an example of the inflation rates for various basic goods and services a few years back and what they cost today. In South Africa we use the consumer price index, or CPI, to measure inflation. It currently sits at around 4% per year, yet electricity tariffs have surged almost 12%, education expenses have risen by 7%, and medical inflation is estimated to be above 10%. Your inflation rate will depend on your life stage, your basket of goods and the price change of your basket of goods over time.

Employers tend to use the CPI as a benchmark for annual salary increases, which results in employees losing buying power, as their inflation rate is often higher than the CPI. Inflation, like a cancer or virus, quietly eats away at the buying power of your money or the value of your investment, and you may not even be aware of it. Suddenly, one day you might wake up to realise – too late – that your money has become worth less and less. By then, it might be too late. The cost of goods and services increases over time, so let’s take a look at how much you will need to buy a family sedan in ten or 25 years’ time. Or what a year at university might cost ten years from now – a cost that will be specifically relevant to young families who have to plan for their children’s education.

A family sedan costing R272 000 today will cost R369 000 in ten years’ time. And if you are planning to send your children to a private school or university, you might need to have around R464 000 per year to pay for their continued education.

INFLATION (CPI) AND BUYING POWER

Even though the CPI is quoted widely, people often question the validity of the inflation rate and how relevant it is to them. Before we delve into this more deeply, let’s clarify what the CPI is and how it is calculated. According to Statistics South Africa (Stats SA), the CPI measures monthly changes in prices for a range of consumer products. Changes in the CPI determine the rate of inflation. The CPI can also be used as a cost-of-living index.

How is the CPI measured?

The prices of goods and services consumed by South Africans are used to calculate an inflation rate for the whole economy. Not all South Africans consume the same goods or services, nor do they consume them in the same proportions. The CPI therefore cannot measure the way individual households experience inflation, or how they spend their money. As a result, the inflation rate is based on the estimated total expenditure of all South African households.

The estimated total expenditure is determined by means of the Income and Expenditure Survey (IES), a national survey in which households are asked detailed questions about what they spend their money on. The results of this survey provide a picture of the expenditure of an average South African household. This expenditure pattern is then used to determine which items are included in the basket of goods that is used to determine the CPI, as well as how much weight a particular item carries.

HOW DOES STATS SA DETERMINE WHAT GOES INTO THE INFLATION BASKET?

Two criteria are used to determine what goes into the CPI basket: total expenditure on the item and the number of households purchasing the item. This is to ensure that expensive items that are bought by a few households only (such as musical instruments or boats), or which are purchased often but are so cheap that their weight would be insignificant (for example, matches), are not included in the basket.

Is there only one inflation basket for the country?

There are CPI baskets for each province, and for each primary urban area, secondary urban area and rural area. All unique items that appear in the provincial baskets appear in the national basket. There are currently 393 items in the basket.

How are prices collected to measure inflation?

Stats SA has permanent staff appointed as price collectors. They visit sampled outlets and markets monthly to record actual prices on the shop floor. Staff at the Stats SA head office in Pretoria collect information on prices for services using a variety of methods. This information is then used to calculate the CPI.

It is evident that it is very difficult to determine the exact CPI for every South African. However, the broad measure of the CPI provides a good indication of the level of prices and the general increase in the level of prices in South Africa.

Categories Non-fiction South Africa

Tags New books New releases Penguin Random House SA To 100 and Beyond Wynand Gouws