Acquiring Personal Wealth and then Sustaining it

One day whilst looking into the mirror in your old age and reflecting on what a great life you have had; you will thank your younger self for the smart decisions that you have made over the decades. That is easier said than done because to be in that position, one needs to be both disciplined from a young age and have a long-term strategy in place.

Like the Norwegian oil story which speaks to how a nation had created abundant and sustainable wealth from the discovery of a single resource for all its citizens over a period of 4 decades. One can apply that same theory to their personal circumstances and use the “accumulation of personal wealth over time” to create a stable foundation that will ensure the sustainability of these assets over a significant period, perhaps even over many generations. This is opposed to frivolously consuming it as it is amassed to satisfy short-term needs or desires that provide little or no value in the long term.

Acquiring personal wealth may happen in several ways and could include the following:

1. Benefitting from a substantial inheritance,
2. Earning salaries and bonuses or professional fees from your occupation and investing a sizeable proportion of those earnings on a regular basis into unit trusts/mutual funds and personal and/or employer-sponsored retirement funds with underlying assets such as equities (shares), property, bonds, and cash,
3. Buying new assets, or using existing assets directly such as an unlisted business, residential property and unlisted commercial property or even listed Real Estate Investment Funds (REITs), equities listed on a stock exchange for the purposes of generating an income or growing the capital value of those assets or a combination of the two, and even alternative assets such as a collection of fine wines, art, or exotic cars,
4. Winning the lottery! A slim probability but a chance nonetheless that is if you bought a ticket.

There is no one-size-fits-all approach to acquiring wealth, and so your tailored financial plan would very much depend on your level of financial literacy, your lifestyle goals, your time horizon, and the calculated risks (economic, political, geographical, currency, etc.) that you are willing to take over that required period. The general school of thought is that the higher the risk the higher the reward and vice versa, but this would need to be stress-tested against your appetite for risk which can also be described as your tolerance for the permanent loss of capital.

So why accumulate wealth? Well firstly, life can throw you curveballs (and hard ones at that) when you least expect it. Having the necessary means enables you to ensure that you are protected against life’s risks such as :

• a permanent disability and being unable to continue working to generate an income from your profession (the biggest asset of a young professional),
• contracting a severe illness and managing the financial pressures which come with it, and;
• providing for your dependents upon your demise so that they can maintain a standard of living that they have been accustomed to until such time they become independent.

During the early stages of the wealth accumulation process, it only makes sense to transfer the risks that one faces in life as mentioned above to an insurer as this ensures that you and your dependents are protected until such time as your acquired assets can match your needs in the event of adversity.

Eventually you may reach a point where it is no longer sustainable to accumulate further wealth for various reasons, and the risks associated with the nature of your current assets become less palatable. The focus then shifts to preserving that wealth using various mechanisms which may include some of the following:

• preserving your accumulated corporate retirement fund when resigning from an employer
• selling your business under favourable market conditions and realising the cash value
• de-risking your investment portfolio from a higher weighting in aggressive growth assets to a higher weighting in conservative income-producing assets,
• drawing an income at rate lower than the anticipated growth rate from your pension when in retirement,
• setting up a trust so that assets held within it are excluded from your estate when you pass away and can be used for the benefit of your beneficiaries and generations to come in perpetuity without incurring any inheritance tax or estate duty (probably the largest tax bill that you will incur).

By engaging with a CERTIFIED FINANCIAL PLANNER professional, they will assist you in crafting a strategy that will enable YOU to achieve YOUR lifestyle goals whatever they may be, and at the same time making sure that the plan is robust enough to withstand your tolerance for risk. Remember, life is not about avoiding risk altogether but rather about managing it appropriately to achieve success.

At this present time when looking into that mirror, promise your older self that you will make some smart decisions about your future now and then take action to turn it into reality!

Yoren Chetty CFP™ MCSI (UK) CFP® (SA)