* Please note that the information provided below does not constitute financial advice; in fact, we cannot give specific advice. Generic information has been provided given the context of your question. We have limited details about you and your circumstances, and knowing more details may affect any advice provided.
Being forced into early retirement can be overwhelming. Most of us start with a plan when we start working: save what we can in the hope that when we decide to retire, we can do so comfortably. However, like you and many others in the past two years, circumstances change, leaving you seven years before your expected retirement age, forcing you to restructure your entire retirement plan.
Before looking at various options related to your questions, it is important to understand the effect that early retirement has on a person’s portfolio. To illustrate this, the following table compares the compound effect of retiring at different ages with the same investment assumptions. If you saved R1,500 per month on an investment yielding 9% per year from age 25 until you retire at age 55, 60, or 65, you would have the following amounts at retirement:
|Selected retirement age||Retirement value|
|55||R2 014 987|
|60||R3 230 252|
|Sixty-five||R5 132 968|
Based on the above, by delaying retirement for 10 years between 55 and 65 years, you accumulate R3 117 981. Unfortunately, given your circumstances, you have missed those last vital years of compound growth and, therefore, you should reconsider your retirement strategy.
Where do we go from here?
What options do you have with the funds available to you? Below, I discuss several investment strategies that can help you with the journey ahead.
1. To minimize the tax effect on rental income, should you invest in a retirement annuity?
The rental income you receive must be added to any other income you may earn, and the gross income you receive will be taxed at your average tax rate. There are two ways to reduce the amount of tax you pay on your rental income. First, any rental income may be reduced by allowable expenses incurred during the period the property was rented. However, only expenses incurred in producing that rental income can be claimed. These expenses include:
- Taxes and fees;
- Bond interest;
- Real estate agent fees;
- Homeowners Insurance;
- Gardening services;
- Repairs with respect to the rented area; and
- Security and property fees.
The second way is to invest in a retirement annuity. Retirement annuities are the foundation for most when it comes to saving for retirement, as you only have access to the funds starting at age 55. However, they are just as important after retirement.
The top three benefits of contributing to a retirement annuity are as follows:
- Your annual taxable income is reduced by the amount you contribute to a retirement annuity during the tax period (subject to certain limits).
- Returns within the retirement annuity are tax free.
- You can roll over your Sars tax refund into your retirement annuity, thus increasing your total refund each year.
2. Where do you suggest that I invest my savings balance? I have looked at some of the previous articles on retirement annuities abroad and looked at other opportunities as well, such as Nedbank’s 60-month fixed deposit for seniors 55+, which offers more than 10% interest, and other options like the Coronation Top 20 Fund. , which has achieved an average growth rate of about 14% for the past nine years after the rates.
3. My financial situation has also improved slightly in the last three months (I managed to find work again, although without pension benefits) and now I am receiving a salary. I can save another R50,000 a month for at least a year. What can I do with these additional savings?
When it comes to discretionary savings, there are many more options available to you.
However, before making a decision on what type of investment vehicle to use, you should ask yourself the following questions:
- What is the term of my investment?
- Do I need to have access to the funds?
- What is my appetite for risk?
These three questions will lead you towards an investment strategy tailored to your specific needs and goals.
Depending on your scenario, we will assume the following:
- You will be investing for more than 10 years, making regular contributions with your disposable income.
- You will need access to the money in case you need to cover unforeseen expenses or generate income.
- A moderately aggressive risk profile, as its main objective is to build an asset base for future use.
The most appropriate investment based on the above assumptions may be a local or foreign unit trust investment. A unit trust is a great tool when building a diversified portfolio, as it can cover a variety of asset classes, both locally and offshore. These asset classes include stocks, bonds, cash, and property. A unit trust is a flexible investment product with ample liquidity should you need it.
The chart below illustrates how to invest your additional R50,000 per month for a single year and then let the portfolio grow for a total of 10 years. With the mandate of the portfolios assuming different levels of risk.
When setting up a portfolio, the key is to select a diversified mix of funds and managers that provide active asset class management. These fund managers can shift fund weights to specific asset classes to take advantage of market movements. Your choice of funds will ultimately depend on your circumstances, investment horizon, and risk profile.
4. As far as I know, I cannot stop pension withdrawals, but I can reduce the withdrawal rate to 2.5% for at least as long as I am employed again.
A vital annuity is a great way to reinvest your retirement savings, whether it comes from a pension fund, provident fund, preservation fund, or retirement annuity. The vital annuity provides you with income and the flexibility to structure the underlying assets to suit your retirement goals. Nor is it necessary for you to comply with Regulation 28 of the Pension Fund Law.
For the income to last your retirement years, you need to consider the maximum amount you can withdraw without eroding your equity. You are currently allowed to withdraw a minimum of 2.5% up to a maximum of 17.5% and you can only change your withdrawal rate on the anniversary date of your pension product. If you are in a position where you can reduce your reduction rate to a minimum, we recommend that you do so. This would allow more of your funds to remain invested in the market and thus remain exposed to potential growth.
Taking it all home
Don’t put all your eggs in one basket! A great way to navigate early retirement can be to combine the investment tools mentioned above and an emergency fund. Having the opportunity to go back to work will take some of the pressure off you that you may face if you can allocate your earnings accordingly.
Ideally, it would be helpful to allocate a portion of your earnings to a retirement annuity and unit trust. By allocating your funds to a retirement annuity, you can reduce your taxable income and get the benefit of additional savings. The unit trust portfolio can be structured with underlying funds that aim for long-term capital growth and rest assured that the product provides liquidity and flexibility.
If income is not an issue, it would be beneficial to reduce your vital annuity income or pension fund income to the minimum of 2.50%, as this would leave more capital exposed to higher growth as you rebuild your capital base.
Building a well-structured investment portfolio that provides diversification across different asset classes, and having a well-thought-out retirement plan that is in line with your financial needs, will make a significant difference when navigating the uncertainty of the future.