A Moneyweb reader asks:
I have R200 000 and would like advice about the best place in which to invest it. My time horizon is ten years. I’m 49, have a pension fund/RAF worth R8.7 million, and other savings of R4.1 million (shares/ETF, local unit trusts, emerging-markets unit trusts, global unit trusts, property (not my residence) and cash).
I contribute over R360 000 pa to pension funds/RAF and fully use the tax-free savings vehicle (R33 000 per annum). I have no debt.
Lisa Hudson-Peacock - Southwood Financial Planning
Firstly, well done on being so disciplined with your savings. You have managed to accumulate a total unencumbered portfolio of almost R13 million, well diversified across asset classes, at a relatively young age.
It is not immediately clear whether this amount will be sufficient to fulfill your income needs post-retirement and we would need to do a full needs analysis before making any recommendations.
If we assume that your disclosed pre-tax retirement contribution of R360 000 per annum is based on a 15% salary deduction (max 27.5%), then your implied current pre-tax annual income is R2.4 million, or R200 000 a month. For the sake of argument, let us assume that you will maintain your current salary in real terms until retirement. Without taking into account your specific needs, it is reasonable to further assume a post retirement income target of 75% of final salary to maintain your lifestyle thereafter.
By our calculations, you will need to work until age 68, assuming your current savings rate and long-term asset class returns, to achieve a post-retirement income of R150 000 per month until age 90.
A financially-comfortable retirement is certainly possible. However, your current circumstances must prevail for the next 15 years. In an uncertain world, this cannot be guaranteed — but, with all things being equal, the R200 000 investment can afford to take on a little more risk than would be the case if you were hopelessly underfunded.
We don’t have enough information to ascertain the geographical diversification of the R4.1 million discretionary (non-retirement) portion of your portfolio. That said, the bulk of your overall portfolio is the retirement portion and is likely to be using the full 25% offshore allocation permitted by Regulation 28 of the Pension Funds Act. By implication, the overall geographical allocation is largely domestic.
Determining your offshore exposure and deciding how best to maximise and manage it would form an important part of our discussion with you.
Given the available information, and subject to in-depth discussions, it is likely that we would make four broad recommendations and suggestions:
- Geographical diversification is paramount to SA investors if they are to dilute the risks of our fragile, resource-dominated, and politically-unstable economy. We would recommend internationalising the funds via your personal foreign exchange allowance.
- Your ten-year time horizon and implied risk appetite is high, with the R200 000 under consideration representing only 1.5% of your total portfolio. We would therefore suggest considering riskier assets with commensurately higher expected returns over the medium to long term, such as globally-diversified equity funds with exposure to asset classes and industries not available domestically. You may want to give thought to emerging technologies, the biotech industry, or alternative-energy companies, for example. Aggressive investment strategies and alternative hedge funds could also be considered, such as venture-capital funds, distressed debt, and private equity.
- Given the high effective tax rate implied by our calculation of your annual income, tax efficiency must be considered in structuring any new investment. We would certainly consider an offshore life wrapper to enhance tax efficiency.
- Given that you have provided well for retirement already, an estate/intergenerational planning strategy should be considered. You are using your full annual allowance for a tax-free savings account (TFSA), and you may wish to contemplate setting up TFSAs for other family members, such as dependent children, in anticipation of future expenses: university, gap years, cars, marriage, and the like. With an investment amount of R200 000, this could be done by using your R100 000 annual donation allowance with contributions to up to three TFSAs split across two tax years.
There are many assumptions in these recommendations that highlight the need for personal financial planning. It is so important for us to get to know our client and understand their financial needs and goals. This requires so much more information than can be provided by a list of assets and an indication of current income. Life is uncertain and circumstances change; what is appropriate today may not be tomorrow. That is why a professional financial planner is there for the long term.