Chapter 7: Risk of non-payment
Capital loss is a reality and in the pension world, unfortunately well known. When a person retires there are many factors to consider. The first is the risk of non-payment of the capital sums you may have saved and lost due to a multitude of factors, which can include political problems in a country, investment conditions, crime, or loaning to family members that do not pay back. A final frightening factor is pension funds that do not perform as they should and the resulting payments being decreased or lost due to fraud and mismanagement.
One of the heart-breaking things, I find as a financial planner, is the parent who has lent the child a large sum of money for a car, home or business. While some children are amazing to their parents, it would astound people, how many children take the money and never pay it back. Often these children then abandon their parents in their hour of need.
|
One terrible Christmas, I was called to our local old age home for a person who was in a severe depression. On entering her flat I found her only son had visited this person, who was his mother and removed her microwave and car on a loan. She had sat the full Christmas day refusing to accompany her friend, my mother to our house, as she believed her son was coming to take her out. The day came and went, the next day too. On the third day after Christmas, my mother called me in, believing the woman had gone into suicide mode. As a financial planner, I had often counselled these elder people. Due to the fact I am also a master hypnotherapist and have studied psychology and herbs, my advice was often used not just for financial and estate planning. There was little to help the grieving process in this case, but to keep watch on the lady until she came to a place of acceptance. The pain of betrayal is not one that can be hastened by advice. Fortunately my mother was one of those rare people who could lighten up a dark building. With her help the lady was able to grieve but survive. At the time of her death, her son had still not returned to visit his mother and had hung up the phone on her calls. |
It is of course not only children, but siblings, friends and family are just as culpable. It is a very true adage given by Polonius in Act-I, Scene-III of William Shakespeare's play, Hamlet as he counsels his son Laertes. Polonius states” Neither a borrower or a lender be. For loan oft loses both itself and friend. And borrowing dulls the edge of husbandry”. Hamlet Act 1, scene 3, 75–77. It seems the problem of non-payment of loans is not a modern one!
One of the biggest temptations is when a person takes the lump sum from the Pension fund. Remember often this is more money than the person has ever had. One thing we as humans do, is try and revert to a position we are comfortable with. If that position is have a hundred bucks in the bank and we are given a million, we will find a way to revert to our normal position of a hundred. This fact is why most people who win money are broke within months of wining.
To give a normal person a large lump sum of money without counselling in my mind is tantamount to setting them up to failure. No where do we see this more than in retirement.
When the lump sum and the monthly salary is moved we have no choice but to depend on social welfare. However what happens if we have a lump sum, but the timing to convert it to income is not the right time?
We call this situation, liquidity risk. Liquidity risk is a problem, as without income we find it hard to survive let alone eat. In a company, liquidity risk is when the company cannot pay their bills. This does not mean the company is bankrupt, as there may be a storeroom full of stock, but the actual cash is not there to be accessed. Liquidity risk in the company, is one of the main reasons companies fail in the first year.
Liquidity risk, is not having sufficient money to meet your immediate needs. Often liquidity risk is found when a person is retrenched in their fifties and cannot access their pension funds till they reach a certain age. Most people are only as solvent as their last pay check. In other words savings are non-existent or very minimal. The result is although they may have cash reserves in the fund, they cannot afford basic needs such as repayment, water, lights and food. As a result they end up by selling existing assets at a lower price or enter into further debt- creating a poverty spiral in which first moveable assets are sold, then the house and cars.
Financial planners will try and set up an emergency savings account for their clients, but this can only be done if we have a budget of expenses and are able to keep the client’s sticky fingers out the account. Most financial wisdom states that a sum for at least three months expenses, should be kept in this account, I prefer to keep a year’s expenses in that account, as I find three months is not enough in a time of retrenchment or illness. On retirement, often there is a three to six month period, in which pension monies are not received, as a result of the administration required, so again three months is cutting it fine.
What we do not want is to expose this emergency savings account to risk, but we should ensure that it keeps pace with inflation at the same time. Risk becomes a large part of the money management of a person, if we are to get a return on our savings. We need to investigate this in terms of the return on the savings and investigate what can happen to them.