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A retirement plan few will tell you about

Start early, don’t cash out money earmarked for retirement, ignore all the media noise.

For those of you who do not know what a tax-free savings account is, it is basically government’s way of giving you money encouraging people to save and invest. Everything you put into a TFSA is, well, tax free.

There is no Capital Gains Tax, and you wont be taxed on any interest, income or dividends. In short, TFSAs are pretty awesome.

However, there are a few rules. You are not allowed to put more than R33 000 a year into your TFSA, and you are not allowed to contribute more than R500 000 in your lifetime. These values will hopefully be increased over time, which would be great, but for now these are the limits. If you contribute the maximum amount per year, which is R33 000, it means you will be putting in R2 750 a month. At this rate, you will reach your lifetime limit in 15 years and two months.

If you were able to cut out some expenses and free up R2 750 a month, what kind of future investment value could you be looking at, and would it be enough to retire on?

Since a TFSA should be a long-term investment, I am going to assume a 100% equity allocation, which, historically over the long term, would have returned a little over 15% (I have previously got some flack for using this value which many feel is too high – but just remember that whenever you see articles quoting long-term performance figures, keep in mind that most of the time they are forgetting dividends). So, for now, let’s assume an annual return of 15%.

Using this, I calculate that after the 15 and a bit years of making a R2 750 monthly contribution to a TFSA, you will have a nice little nest egg worth just over R1.7 Million.

However, this is R1.7 million is “future money” and we need to account for inflation (historically this has been around 6% pa). After making the adjustment, you will have around R726 000 in today’s money. 

The above calculation is for the case where one contributed a lifetime limit and then immediately stopped and cashed out. However, all the youngsters out there are in an extremely fortunate situation with a lot of time on their side.

Let’s take the case of a 21-year-old, fresh out of university/college, with the world at their feet, and assume they make a R2 750 monthly contribution to their TFSA until they reach the lifetime contribution limit, and then leave that investment untouched until they are 55 years’ old. With this extra time, the power of compound interest kicks in.

At age 55, this person will have a tidy R3.3 million in today’s money. And tax free. (Using the 4% rule, that would be enough to draw an income of R11 000 a month).

Now, let’s assume that this person found their soul mate – immediately obvious by the fact that they too had started contributing to their TFSA at age 21. If we combine their TFSA values at age 55, they would have R6.6 million. If they followed the 4% rule, that would allow them to draw an income of R22 000 a month – inflation adjusted until the day they die. 

While they are not going to be jet setting across the world in a private jet, R22 000 a month is probably enough for a modest to comfortable retirement. And in light of the dismal retirement stats in South Africa, R22 000 a month would be something most retired couples would accept with open arms…

For those who are still not convinced, let’s run the scenario a little longer. Instead of stopping at age 55, assume they each continued to work for another five years, and then retired at age 60. This is what they would each end up with (inflation adjusted):

The couple’s combined TFSA balances would be worth more than R10 million in today’s money. That would be enough for a monthly, tax-free income of R33 000.

Despite investing for a little over 15 of their 39-year working careers, a couple, maxing out their TFSAs from an early age, and without any contributions to anything else (RAs, company pension plans, discretionary investments, among others) would have more than enough for retirement.

So, a pretty solid retirement plan would be:

  • Age 21-36: Contribute R2 750/month to a TFSA 
  • Marry someone doing the same 
  • Age 36-60: No more investing, blow all your cash on cars, houses & travelling
  • Age 60: Retire with more than enough (> R10 million)

The key takeaways from all of this (and you have heard these many times before, but definitely worth mentioning again):

  • Start early
  • Don’t cash out money earmarked for retirement
  • Ignore all the media noise, talking heads, perennial pessimists and continuous warnings of impending doom.

*For the more conservative, I reran the numbers using a return of 12% per annum, inflation adjusting the final investment amount, and using the 4% rule to estimate retirement income. The results for someone starting at age 21 are still pretty decent:

– After maxing out a TFSA (15 years, and 2 months) – TFSA Balance ~R600 000
– At Age 55 – TFSA Balance ~ R2 Million (or R4 Million for a couple = R13 000/month in retirement)
– At Age 60 – TFSA Balance ~ R2.77 Million (or R5.54 Million for a couple = R18 400/month in retirement)

This article was originally published on the Stealthy Wealth blog here.

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If you save that money in an aggressive portfolio RA (75% equity, 20% property, 5% bonds) the results could be similar (with some limitations when retiring from that vs using a TFSA obviously), but you could then use the income tax money your get back/don’t pay for the contributions to a TFSA, and you could* be even better off!

*There could be differences, negative or positive, due to Regulation 28 limitations on retirement products

The problem there is that you will have to pay income tax when you start drawing the money out of your RA, which will really suck when you are a pensioner…
It is a valid point, however most people do not re-invest their RA tax savings, which is actually the only way to counteract the tax you are paying when you start to draw.

What happens if for example I invest R100 000.00 in a TFSA. Will I be taxed 40% on the interest in the first year. What about the following years ?
Will it remain at 40% per year as long as the R100 000.00 is invested or will it at sometime become tax free ?

Bothalyn, the annual contribution limit is R33 000, measured between 1 Mar to 28 Feb. If you put in R100 000 in one year (aka overcontribute), you will pay a tax of 40% on the R67 000 overcontribution, But that’s it, no other tax going forward on what remains of the R67 000 and the other R33 000 that fell within the limit.

So it’s stupid to overcontribute, rather put the R67 000 into normal unit trusts and not loose 40%.

If you put in R99 000 spread out over 3 financial years into TFSAs, you will not be penalized with 40%.

VERY good point.

To BothaLyn, your TFSA provider should not allow you to contribute more that the annual allotment. Although it is technically possible, should you provider be willing to do that, look for another provider.

Drachir, regarding your response to Bothalyn re limits, you seem to be assuming that all the TFSA investing is done through ONE service provider. You can invest across as many as you wish, It is up to you to keep track of how much you have invested for the year.

Great article, Stealthy.

Question is, will it get through to those people who know they need to follow this advice but keep dithering and putting it off until it’s too late?

Keep up the good work.

Excellent advice. However, if our 21-year old can afford the R2750 per month when she starts working, it means that she will pretty soon have a lot more money to save per month, albeit not in a TFSA. The trick is to always increase savings faster than increases in one’s standard of living. This is not easy, especially if the sheep around her are living as if there is no tomorrow.

If she maintains her savings discipline, by the time she gets to age 36-60, she is very unlikely to suddenly start blowing all her cash on cars, houses & travelling. She may take a luxurious week in the bush or at a resort every now and then, but she will not be the person with an album full of pictures of her thrice-a-year international holidays.

Very good response. Pity so few see this, even those that are well educate academically.

It has much to do with the values that your parents instil in you.

TFSA is not governments way of giving anyone money. Its simply a tool one uses to prevent government from taking some of your money. Big difference

Personally I find the R33,000 limit quite a put off, maximizing my pension contributions first but a nice tool for my 4yr old

Warren Buffett talks a lot about (especially wealthy} people who think cheap investment vehicles are beneath them. They turn out to big losers over time. Use it, dont use it.

*investment products

Read again Eric. Its a useful tool but rather small. Maximising your 27.5% pension contribution is more effective than the R33,000 annual TFSA limit.

I use it for both my daughter and myself but it hardly be taken seriously with a R500,000 lifetime limit and all the other personal tax exclusions we both receive annually

@mountainboy …..Exactly..!..

R33k per year ??

Thats a slap in the face to hard working citizens like us !…..a few tax increases [ fuel/income/vat etc ] and this measly amount is literally worthless

Sure, the knee jerk reaction would be to say ‘any little bit you can save helps’

But seriously !…R33k ?…when the government and EACH parasite…oops, politician,can siphon MILLIONS every year !!???

And then toss us a breadcrumb INSULT of R33k for the year ‘tax free’

You got to be kidding ??

What very few financial advisers tell you about TFSA’s to supplement retirement:

Its the future…..
Retired Mr Smith needs R600k pa to live.
He draws it out of his regular investments and pays tax on R600k

Now, if he had a TFSA from way back when:
He can draw R300k from TFSA investment
He can draw R300k from his other investment and only pays tax on R300k (low tax bracket)

Use it, dont use it.

My simple plan is to optimize for tax and income:
1. max out RA contributions
2. max out TFSA
3. max out interest free allowance
4. Local dividend and preference shares bought through a company so dividends can be re-invested and as a shareholder you have a large shareholder loan that can be used later.
5. buy reits and offshore shares in personal capacity.
Then at independence/retirement
6. live off tax free interest income (24k), tfsa distributions (all), and reit income (70-80k pa) up till tax free income tax thresholds. Sell some shares up till CGT tax free limit (R40k). All income thus far is tax free. Balance of expenses funded by dividends at 20% tax. Overall tax rate 0-20%.
7. earn a small income on the side as a buffer to allow for extra expenses/holidays/saving/safety.
8. Let the RA kick in at age 55-65 as required.

Well done! Love the summary. (have come across the odd client of mine doing that already, especially post-retirement)

If I may add: IF one is married ANC, you can transfer/donate capital free of tax to your spouse, if she/he has a lower marginal tax rate than yourself. If your interest or CGT exemptions are fully utilized in a given year, the same for the spouse can be used.

If COP married, bear in mind the overall interest/CGT/REIT , rental income, gets split 50/50, so with careful tax planning maximum benefit can be achieved between married spouses.

(Then there’s also Trusts, but rather do that when discretionary assets exceed R10mil, otherwise hardly worth the cost).

Thanks Michael.

How is the R10 mill arrived at?


The R10mil is merely a arbitrary figure in my book (no specific calculations apply). A good number of years ago (early 2000’s if I can recall), articles written around the benefits vs costs around setting up a family Trusts, experts seem to agree that it’s not worth the cost if the assets are under R3mil. That’s money value back then. So my guestimate (today) around R10mil, but could say between R5m-R10m should be your cost threshold.

Assets to Trusts can still be transferred at say lower R5mil asset values, the tax benefit will erode due to costing. Many people set up Trusts for the wrong reasons, and when costs are added up over the years, it’s realised that the attorneys & accountants (financial & annual tax returns are required) cost eroded most of the Estate Duty tax saving. Hence the higher the value, the better.

Personally, am not a great fan of Trusts (since it attracts the highest rate of tax). The era when Trusts were (more) popular, was when a Trust’s income tax rate was lower than of individuals or companies some decades ago. Tax on trusts been increased over the years to end up the highest tax rate. A badly set up trust does more damage than good. NOT a legal expert myself, just knowledgeable on personal tax. Lawyers will favor Trusts…as this is their bread and butter. Don’t get me wrong, there’s place for well set-up Trusts for the wealthy.

@jblack Thoroughly enjoyed your comment. Would you ever be willing to take the time to break down each of your points with a little more insight, perhaps? Such as, “max out RA contributions – You can save XYZ per month into an RA until it reaches ABC”, just so we get an understanding of the limitations? I’d truly appreciate it, as I think others will too. 🙂

Even a 12% pa long-term return return from equities (6% real) appears too ambitious in a retirement plan. We may have seen this historically, but this is unlikely to repeat in future. 4% to 5% is a more realistic assumption. Then we need to factor in the fee impact, probably taking another 1% off the return.

The TFSA is a useful add-on savings product, especially for the young, but it won’t do the trick on its own. You need to save around 15% of income for 40 years to have a comfortable retirement in prospect, and you can’t get around that by saving R33,000 pa for 15-odd years (even if starting early is a big leg-up).

Our TFSA is nothing like the UK ISA which is similar in concept but allows for much higher annual contributions and does not have life-time restrictions.

I don’t know guys. I know of only one viable way not to pay taxes, and that is not to make profits. So, the more a business or investor focuses on tax-avoidance the more he also focuses on profit-avoidance.

We should look at it from another angle. It is like the old farmers said, “The more taxes I pay, the more successful my business becomes.” There is no way around this. So no thank you. I am not interested in the TFSA, I would rather pay the taxes and bank the profits.

TFSA has no down-side, all profits are tax free, can be sold and withdrawn at any time. Not sure why you don’t want the free money?

TFSA is already post tax income invested, buying ETF’s in your TFSA will FAR outperform vs buying them in your normal shares account, no dividend withholding tax, no CGT, whats not to like?

Agree on this – and the beauty of the TFSA is that provided the funds remain within the TFSA you can buy/sell to your hearts delight and avoid being classed by SARS as a trader, so you can afford to take smaller profits more frequently, and the R500,000 lifetime limit only relates to the funds introduced into the TFSA and not the profits made whilst in the TFSA

@ Sensei wrote “The more tax I pay, the more profit I make.”

In that case, all us overtaxed squeezed dying breed called the ‘middle class’ should be mega rich then

Based on your comment, you are either trolling on behalf of SARS, or on tik

What gives Sensei ?


For me, a TFSA is first, then an RA, and I am not convinced that the tax deferral of an RA, coupled with the Regulation 28 restrictions, is better than investing outside of an RA.

So for me
1 – Comply with your Company’s retirement plan (if you do not have one skip step)
2 – Max out TFSA, and overweight it on REITS as this is where most Income Tax is payable
3 – For remaining discretionary funds which you can allocate to saving, consider a distribution between private RA and non-registered investment vehicles. Choose the asset allocation in such a manner as to balance your overweight REITS in your TFSA
4 – Foreign assets should be in non-registered accounts if you have the luxury of maxing out TFSA and RA as the Dividend withholding tax is applied regardless (my understanding)

Further, for non-registered vehicles, depending on transaction costs, sell enough assets to generate a profit of R40,000 on 28 Feb each year and reinvest on March 1. Sound like some schlep, but take our R40,000 CGT exemption over 30 years and is does make a difference.

As JBLACK said, generating retirement income from TFSA withdrawals and Dividend/Interest income from your non-registered investments will have your effective tax rate the lowest it can be, whereas RAs will be seen as Income.

I had them incorporate my R3000pm private RA contributions into the PAYE calculations of my salary. Immediately I got about R800 per month extra in my pocket on payday. That’s 26.6% back, now that extra R800pm can be used for a TFSA or paying off debt (my car in my case) or whatever.

If I didn’t get it extra with each salary, I would have gotten back about R9600 when doing e-filing.

So that is how one benefits substantially from an RA, and one can have it aggressive as I have shown: 75% equity, 20% property, 5% bonds

I am well aware of the tax rebate, either at source of pay or at tax return time. As I said I am not convinced. I currently do contribute to an RA, and religiously invest back the tax rebate when I receive it (currently in my home loan).

What bothers me is the effect of Tax Deferral. I ran some scenarios
Option 1 – RA alone with full reinvested of tax rebate each year in RA – Use Coro Balance fund 10 year performance
Option 2 – TFSA and RA Combo with same reinvestment of applicable RA refund – Use Coro full equity fund for TFSA and BF for RA
Option 3 – TFSA and Non-registered Combo – used Coro Full equity fund performance

As expected, the at retirement the capital balance was Option 1, then Option 2 (just) and the Option 3.

BUT, then start drawing money from it. Using a 25%/17% effective income tax/CGT rate respectively post retirement, using Coro stable fund across all funds (with a slight adjustment for dividend withholding effect in the non-registered fund) I calculated a significant shorter period that I can draw money from Option 1, with Option 3 giving me the longest period of withdrawal.

This is way I am saying I am not convinced. I have however not yet moved away from RAs yet.

I AGREE with you all (jblack / daniemare / supersunbird / grahamcr, others).

All and well using all the tax concessions mentioned in structured retirement income, but don’t plan it so aggressively that you fall into the lowest 0% income tax bracket. Allow still for enough funding buildup to a (pre-retirement) RA Fund or employer Pension fund, so that come (post-) retirement, even when cleverly using the R40K p.a. CGT-exemption on UT/ETF/Shares, and your TFSA withdrawals….so that you fall in some tax bracket with your ‘compulsory’ income.
The reason I say this, is to allow your Medical rebates (both Section 6A & 6B, especially after 65-age) to be allowed to “kill” the final bit of tax due to SARS 🙂
(Otherwise, if you end up arranging your post-retirement income so low and tax-exempt…then future medical rebates won’t be of any advantage to you).

….caveat: assuming that we all will STILL(?) have Medical rebates in future years, or annual CGT exemptions. Can be taken away at the whim of the FinMin.

My earlier comments on switch from pension funds of tax free portion R500k to tfsa ,not posted ??breach of some kind??

All sounds great but how many 21 year old couples each have disposable incomes of R18333 per month today and assuming they saved 15% of after tax income.Unless they still shacked up with mommy and daddy and did without the nice cars and gadgets etc. there’s no way they’d have R5500 between them to put into tax free accounts!

That and also, why is the calculation done with such a high interest rate and no mention of fees?

Probably few 21 year olds have that available, so start on R300 or R500 per month?
It may take 21 or 25 years to contribute the full 500k, but to get there by say age 45 and leave it to grow for the next 15-20 years will still be significant.
TFSA’s started just before my 40th, so I’m planning to reach the max over the next 13 or so years. Then leave it for another 10 or so years and use it as a component of my retirement income sources.

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