Monthly Archives: July 2016

Reality of retirement

In this advice column Robin Gibson from Harvard House answers a question from a reader who only has ten years to save up for retirement.

Q: I am 56 years old, healthy, have a reasonable job and presume I can work for the next 10 years.

I have a home which is worth about R2.5 million, with a relatively small bond. However, apart from an annuity worth about R300 000 I have no other savings.

My youngest child is almost independent, and in a couple of months time I will be able to save R10 000 per month. This amount can increase to R20 000 in the next 18 months.

How should I invest this money and how much trouble am I in?

The really important question here is the last one. In our view, any investor currently requires approximately R1 million for every R4 200 of monthly income they want before tax and after costs.

This yield is specifically constructed to provide an escalating income that keeps up with inflation. We are aware that an investor can source a fixed yield that is higher, but that would mean that it doesn’t increase in the future and progressively becomes worth less.

This also assumes that your capital will be maintained and over occasional periods will grow faster than inflation. This is important, because if you don’t have to use up your capital, how long you live and how long you need an income for become inconsequential. You could live beyond 100 and still have a secure income.

This is obviously the optimum position.

The next important question is then what to invest in to give you the best chance of building a retirement pot. The table below will demonstrate a value in today’s money of what your savings could be worth in ten years’ time. This is based on 18 months of investing R10 000 and then 102 months of putting aside R20 000 per month.

When looking at this table you have to consider that there are two key drivers that affect the investment return.

The first is cost. It may seem intuitive but it is amazing how investors are so easily duped. Costs reduce returns, and the higher the costs, the bigger their impact.

Where investors are usually fooled is that they are led to believe that their provider is somehow 25% to 30% better than the rest over a longer period. We are not so sure anyone can consistently claim that. There are good value options out there, so be cost conscious.

The second consideration is your choice of asset class. Investors hate volatility, but growth assets come with volatility. As a result, most dilute their returns with stabilising asset classes that have no track record of beating inflation over longer periods.

If you want to achieve returns of well above inflation, you therefore have to be prepared to live with short-term volatility. That means investing in products that predominantly hold growth assets such as equity and listed property.

Finally, something the reader has not specified is their expectations in retirement. Probably the biggest hurdle we face with individuals about to retire, is that they want to continue their current lifestyle with very limited resources.

In this particular instance, you should consider the possibility of downscaling and modifying your lifestyle to unlock the capital in your home. This will both provide more capital and potentially lower your required income.

what you will do after retirement

Traditionally, the focus of every financial plan was retirement. Everything was built around the day that you have to leave formal employment at the age of 60 or 65.

However, more and more people are having to ask what happens next. In a time when life expectancy is steadily increasing, the idea of throwing away your briefcase and putting your feet up to live out your ‘golden years’ in peace and quiet is looking increasingly less appealing, and less practical.

For a start, there is little point in retiring ‘to do nothing’. Many retirees find that they are actually busier than they were during the working lives, but the difference is that they can do what they enjoy.

“We are finding more and more people who are re-thinking retirement,” says Kirsty Scully from CoreWealth Managers. “In most cases, they have been professionals in their careers and they want to stay employed to continue with their personal and professional growth and development, yet they don’t want a typical work schedule. They are looking for flexible working arrangements so as to have a good balance between work and leisure.”

Wouter Dalhouzie from Verso Wealth says that from both a mental and physical well-being point of view, it is important for retirees to keep themselves occupied.

“I had a client whose health started failing shortly after retirement,” he says. “He started a little side-line business and his health immediately improved. When he retired from doing that, his health went downhill and he passed away within a matter of months.”

Verso Wealth’s Allison Harrison adds that she recently attended a presentation that discussed how important it is for people to remain active. “The speaker explained that if we don’t continue using our faculties, we lose them as part of the normal ageing process,” Harrison says. “The expression she used was ‘use it, or lose it’!”

When you withdraw your retirement benefit

In this advice column Beata Carstens from Veritas Wealth answers a question from a reader who is thinking of withdrawing his pension.

Q: I am 39 years old and have worked for the public service for just over 11 years. I am considering resigning because I want to further my studies for the next three years.

My current retirement fund value is R947 113.

How much will they tax me if I take this out and how best can I invest it?

The short answer to your question is that you will be paying R191 820.51 tax on a retirement fund value of R947 113. In other words, 20.25% of your retirement benefit will be paid to the South African Revenue Service (Sars).

How this is calculated is that your capital will be taxed on a sliding scale. The first R25 000 is tax free, the next R635 000 will be taxed at 18% and the balance will be taxed at 27%. Although not relevant in this instance, any amount over R990 000 would be taxed at 36%.

However, you can avoid this tax entirely by transferring the benefit to a preservation fund. This is an option you should seriously consider.

A preservation fund works in the same way as a retirement fund, except that you don’t have to keep contributing to it. You will be able to make one withdrawal from this fund before your retirement date, but otherwise you won’t be able to access the money until you turn 55.

Once you retire from the fund, the first R500 000, less any amount you have already withdrawn, will be paid out tax free. At this point you can withdraw up to one third of the capital as a lump sum if you like, but the rest must be used to arrange a monthly income during retirement. You will be taxed on your monthly income according to Sars income tax tables.