I am a young man in my first job as an assistant at a small IT company. I have a tax-free savings account and retirement savings that I contribute using more than 50% portion of my salary. It sounds like I am on the right track and I am able to do this mostly because I stay at home with my parents.
However, in terms of short-term savings, because half of the salary goes towards long-term investment, I find myself spending almost all of the rest of my income on “nice things”.
Do you think it is fine to do so or should I also set aside short-term savings to be able to live independently? My idea is to use the long-term savings to afford to live and survive on my own in five years.
Constructing a resilient investment portfolio will always consist of different investment products – as they all play different roles and hold different benefits. There will also be different goals driven by different needs, some short term and some longer term, and these will be unique to every person. It is also important to remember that an investment portfolio is not a stagnant concept – it will change as your life changes.
As a younger person starting out your investment portfolio, I think you have done a very good job so far with two products, which I would definitely advise most people to start with. These form part of your longer-term planning – and I would advise you to keep it that way.
A retirement annuity has many different benefits – the tax-deductibility of your annual contributions are a great benefit as soon as you start earning an income. You are allowed to contribute up to 27.5% of the greater of your taxable income or remuneration to a retirement fund, capped at R350 000 per year. These contributions are then tax-deductible. As our incomes increase annually, my advice would be to try to maximise your tax benefits on this product – the funds you receive back annually can be reinvested again in some of the other products in your portfolio – we will get to this at the short-term goals.
The tax-free investment is an incredible product, offering so many benefits for a voluntary/accessible investment. With the annual limit recently increased to R36 000 pa, I think this is a must-have product for any portfolio. Contributions are limited to R500 000 in your lifetime – the investment is, however, still allowed to earn returns to any level possible. When you get to the phase of withdrawing from the investment – all the proceeds will pay out completely tax-free.
Compared to a tax-free savings account any other accessible type of investment, like a share portfolio or a normal voluntary investment, you’d pay capital gains and income tax on interest earned. We are advising people to use this product as part of their retirement planning as well – ideally, you can withdraw an income from this investment at retirement, without being taxed on any of it.
You also have flexibility in terms of the investment strategy, having options to invest in many different underlying funds, within the constraints of the product. Although you have a wide range of available funds to choose from when selecting the investment strategy here – there are some constraints with a tax-free investment. Only non-fee class funds are available for this investment, and funds including performance fees cannot be selected. Your financial advisor can assist you with a list of the approved/available funds. This investment can range from only being invested in a low-risk, money market type of fund, to being invested 100% offshore in equity-based funds. You have options and freedom.
With this investment, time is, however, important to really benefit from the rules of the investment. Also, remember you cannot ‘make-up’ for withdrawals by contributing in excess of the limits. Therefore I would advise keeping it a long-term investment, even though it is accessible at any time.
I will definitely advise you to start saving for the short term. If the aim is to start living independently five years from now – the fact that you are already saving 50% of your income is fantastic – not many people have this opportunity. I will use the opportunity of not paying rent at this time to be able to save for the shorter term.
Depending on what your definition of “independent living” is, there will be a few different aspects you need to plan for. Whether it’s to have enough capital saved up to make a few lumpsum expenses to settle yourself in, or to use the saved capital to supplement your monthly income as you will have more expenses now. It might be a good start to set up a strict budget listing all the additional expense you will have when living independently – and then you can plan from there.
Depending on your specific wishes, my advice will be to build up a “buffer investment” that can be used to pay a deposit on a property, buy furniture, or just provide some cash flow for the initial rental deposit you will need and the first month’s rent if you decide to rather go the route to rent for now.
I will advise starting a voluntary investment (different investment companies have different names for this product). This is a completely accessible investment. You are allowed to invest any additional funds at any point – you are also allowed to withdraw funds at any time. Making a monthly contribution to this investment can assist you with saving for the shorter-term goals – as I referred to above, you can also reinvest the funds you receive back from Sars annually for contributing to your retirement savings, providing an additional capital injection in your short term savings.
The investment strategy can be a lower risk strategy as the timeline will be shorter, focusing more on money-market, multi-asset income-based and balanced funds. You will not be too exposed to market volatility, and these funds can then be used on a shorter-term basis if you decide to move earlier as well.
As soon as you do make the move to be independent, you can revisit the percentage allocations to each investment. I would still advise keeping the retirement annuity and the tax-free investment contributions as high as possible while still fitting it into your budget and considering affordability at that time.
When you get to a stage in life where you are already saving your maximum R36 000 pa into your tax-free investment, the new advised voluntary investment can be used to save more – keeping the funds accessible and still providing the diversification in your portfolio with the different investment products.