How does a young saver go about meeting long-term savings goals? Can they do it through direct investment or can a financial advisor add some value to a savings plan?
This is a question from Moneyweb reader:
I am a 24-year old male (recently married) and would like to know what I should do to get the most out of my savings. Currently I am saving R2 100 in a retirement annuity (RA) (platform based on an Investec platform), my financial advisors pick the unit trust funds where my monthly debit order is divided into on the platform. This monthly contribution will grow every year by 5%.
I am also saving R1 500 monthly also on the Investec platform in four different unit trusts funds, namely Visio, Foord FoF, PSG, and 36One flexible fund. My total amount here is already in excess of R100 000, this would be for a deposit on a house in the near future.
Is it better to not invest the R1 500 through my financial advisor and actually go it alone and track these equity unit trust funds and buy shares like Capitec, Naspers, BAT etc?
I pay 1.5% administrator fees once-off on both my RA and normal investment and also 0.75% annual fees before tax.
Then regarding the tax-free savings accounts, I would like to utilise this to its full extent and thus invest very aggressively in equities. What platform is the cheapest and offers me the freedom to invest aggressively?
I just feel that at the end of the day I pay a lot more on administrator fees than I pay Investec for using their platform? My issue is that with my RA the administrator fees will become ridiculously high over the next few decades. What can I do there as well?
I would like for my savings to be used to its full extent as I am very young, driven and already have the end game in my thoughts (retirement).
Craig Gradidge from Gradidge-Mahura Investments responds:
The reader has done well to start saving at a young age, and he will do well to maintain this discipline over the long term. He has come into the market at a good time, and the risk is that his recent experience of the market may create an unrealistic expectation of long-term return expectations, and potentially lead to over-confidence in terms of his ability to make money from the market on a consistent basis. Given his age, and personal circumstances, he stands to benefit significantly over time from refining his strategy and making some of the savings that he refers to in his query.
Retirement annuity savings
He is contributing R2 100 per month with a 1.5% initial fee and 0.75% admin fee. In addition to admin fees, he would be paying an advice fee and an asset management fee. The admin fee that he is paying is on the high side if it is indeed 0.75%. From my understanding, Investec charge a lower admin fee than that, and he may be confusing the advice fee with the admin fee. He needs to look at his total fee (admin, advice and asset management) to get the full picture in terms of his fee structure. Anything over 1.80% p.a. and he is paying too much.
From my calculations, his contributions of R2 100 (less the initial fee) and his fund value will grow to about R18 780 000 (R33 577 000) assuming a return of CPI+5% p.a. after fees, and retirement at age 60 (values in brackets for retirement at age 65). If he were to get the initial fee reduced to 0%, then this increases to R19 106 000 (R34 161 000). However, if he is able to reduce the annual fees by 0.5% his value would increase to R21 168 000 (R38 638 000).
The impact of the annual fee structure is significantly greater than the initial fee. He has not disclosed the current value of this RA investment so I cannot say what the final amount is expected to be.
It is important that the reader has completed a comprehensive retirement plan with his adviser so that he knows whether or not this amount comes close to meeting his requirements in retirement. That is as important as having the right selection of funds and/or administrator.
The reader has saved up an amount of R100 000 and is contributing R1 500 per month. He has indicated that this is for a deposit on a house in the near future. From what he has disclosed, it appears that he is invested in a selection of growth-oriented funds from Visio, Foord, PSG and 36One. There appears to be a mismatch between investment risk and investment horizon if my assumption around which funds he is invested in is correct. It may be an idea for him to reduce risk and avoid a situation where he needs the funds at a time where markets are down.
Regarding his question about DIY versus advice: he alone can answer the question about whether or not he is able to allocate the time needed to monitor and analyse individual shares, and construct and manage his portfolio without independent input and opinion. He does raise the issue of fees as a factor in going it alone, which is fine, but he needs to be sure that he achieves the cost savings and his objectives in a DIY strategy.
Tax-free savings accounts
The new tax-free savings accounts (TFSA) are designed to benefit people such as this reader, particularly when it comes to long-term savings. I would encourage him to start an investment in a TFSA soon, but just to be careful about the choice of product provider, and underlying portfolio.
He mentions investing ‘very aggressively in equities’ as a strategy when it comes to the TFSA investment. I would advise him to consider listed property, and offshore in addition to equity. Listed property has outperformed equity over the long term (20 years plus) on a before tax basis, but underperformed after tax. The TFSA removes the impact of tax and makes listed property an important consideration in a TFSA.
Over time the bulk of listed property returns come from rental income (which is subject to Income Tax), which is a lot less risky than capital growth (which is subjected to Capital Gains Tax).
Consider the example of the Coronation Property fund which was launched in November 2000 (before the massive bull run in listed property). Since inception it has delivered a total return of almost 1 600% (i.e. rental income was re-invested). If you had drawn the rental income instead, your return would have been around 540% over the period. Given that it will take the reader almost 17 years to get to his lifetime limit of R500 000 he could do well by starting a monthly investment into an appropriately-structured TFSA soon.
This country certainly needs more people who are responsible with their finances and who start investing sooner rather than later. I think he will do well, but caution him to think carefully about how he approaches the management of his investment, and guard against putting too much emphasis on recent performance as an indicator of his ability to manage his funds properly over the long term.
I think there is a mismatch between risk and time horizon on the current discretionary portfolio, and that he should start sooner rather than later in terms of starting a TFSA investment.