I am 58 years and would like to get some advice. Due to Covid and work-related issues, I was forced to go on early retirement in August last year. I am getting R324 000 (3% withdrawal) per year after tax from pension and also R270 000 in rental income, of which R113 000 is taxable (after married in community and other deductions). My expenses are R384 000 per year and I have no car or house debt.
I am currently just saving the after-expenses amount into a savings account and tax-free savings and not contributing to any other retirement or savings tool. I have about R200 000 in my savings account. I want to leave some in the savings account for emergencies but invest the rest plus future savings. (Also keeping in mind the R30 000 per annum tax interest threshold for tax purposes.)
My questions are:
- To restrict the damage to tax on the rental income should I invest in a retirement annuity?
- Where do you suggest I invest the rest of the savings? I have looked at some of the previous articles about offshore retirement annuities and also looked at some other opportunities like Nedbank’s 60-month fixed deposit for people older than 55 which offers more than 10% interest or even other options like the Coronation Top 20 Fund which has an average growth of about 14% over the last nine years after fees for example.
- My financial situation has also improved slightly over the last three months as I managed to get a job again (without pension benefits) and now earn a salary and will be able to save a further R50 000 per month for at least a year plus. So what to do with that?
- As far as I know, I cannot stop the pension, but can reduce the withdrawal rate to 2.5% for at least the period that I am employed again.
* Please note that the information provided below does not constitute financial advice; in fact, we are precluded from giving specific advice. Generic information has been provided given the context of your question. We have limited details about you and your circumstances, and knowledge of further details may impact any advice provided.
Being forced into early retirement can be somewhat daunting. Most of us set out with a plan when we start working: to save what we can in the hope that when we choose to retire, we can do so comfortably. However, as in your case and that of many others over the past two years, circumstances change and leave you seven years short of your expected retirement age, forcing you to restructure your entire retirement plan.
Before we discuss various options pertaining to your questions, it is important to understand the effect that early retirement has on a person’s portfolio. To illustrate this, the table below compares the compounding effect of retiring at different ages with the same investment assumptions. If you saved R1 500 per month in an investment yielding 9% per annum from age 25 until you retire at either age 55, 60 or 65, you would have the following amounts upon retirement:
|Selected retirement age||Value at retirement|
|55||R2 014 987|
|60||R3 230 252|
|65||R5 132 968|
Based on the above, by delaying retirement by 10 years from age 55 to 65, you accumulate an additional R3 117 981. Unfortunately, given your circumstances, you have missed out on those vital last few years of compound growth and therefore need to rethink your retirement strategy.
Where to from here?
What options do you have with the funds available to you? Below I discuss multiple investment strategies that can assist you with the journey ahead.
1. To minimise the tax effect on the rental income, should I invest in a retirement annuity?
The rental income you receive should 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 are paying on your rental income. Firstly, any rental income may be reduced by any permissible expenses incurred during the period that the property was let. However, only expenses incurred in the production of that rental income can be claimed. Such expenses include:
- Rates and taxes;
- Bond interest;
- Estate agents fees;
- Homeowner’s insurance;
- Garden services;
- Repairs in respect of the area let; and
- Security and property levies.
The second way is to invest in a retirement annuity. Retirement annuities are the basis for most when it comes to saving for retirement, as you only have access to the funds from age 55. However, they are just as important after you retire.
The three main 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 reinvest your tax refund from Sars into your retirement annuity, thereby increasing your total refund every year.
2. Where do you suggest I invest the balance of my savings? I have looked at some of the previous articles about offshore retirement annuities and also looked at some other opportunities like Nedbank’s 60-month fixed deposit for people older than 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% over the last nine years after fees.
3. My financial situation has also improved slightly over the last three months (I managed to find a job again, albeit without pension benefits) and now earn a salary. I can save a further R50 000 per month for at least a year. What can I do with these extra savings?
When it comes to discretionary savings, there are a lot more options available to you.
However, before making a decision on what type of investment vehicle to use, you need to ask yourself the following questions:
- What is my investment timeframe?
- Do I need to have access to the funds?
- What is my risk appetite?
These three questions will lead you towards an investment strategy tailored to your specific needs and goals.
Based on your scenario, we are going to assume the following:
- You will be investing for longer than 10 years, making regular contributions with your disposable income.
- You will need access to the money should you need to cover unforeseen expenses or draw an income.
- A moderately aggressive risk profile, as your primary objective is to build up an asset base for future use.
The most suitable investment based on the assumptions above may be a local or offshore 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. Such asset classes include equities, bonds, cash, and property. A unit trust is a flexible investment product with ample liquidity should you need it.
The graph below illustrates how investing your additional R50 000 per month for one year only and then letting the portfolio grow for a total of 10 years. With the mandate of the portfolios taking on different levels of risk.
When setting up a portfolio, the key is to select a diversified blend of funds and managers that provide active management of asset classes. These fund managers can change the weightings of the fund towards 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 the pension withdrawals, but I can reduce the withdrawal rate to 2.5% for at least the period that I am employed again.
A living annuity is a great way to reinvest your retirement savings, regardless of whether it is derived from a pension fund, provident fund, preservation fund or retirement annuity. The living annuity provides you with an income and gives you the flexibility to structure the underlying assets to suit your retirement objectives. It also does not need to comply with Regulation 28 of the Pension Funds Act.
To make the income last your retirement years, you need to consider the maximum amount you can withdraw without eroding capital. You are currently allowed to withdraw a minimum of 2.5% up to a maximum of 17.5% and can only change your drawdown rate on the anniversary date of your pension product. If you are in a position where you can decrease your drawdown rate to the minimum, we would advise that you do so. This would allow more of your funds to remain invested in the market and therefore remain exposed to potential growth.
Bringing it all home
Don’t put all your eggs in one basket! A great way to navigate early retirement may be to combine the above-mentioned investment tools and an emergency fund. Having the opportunity to work again will take off some of the pressure you may be facing if you can allocate your earnings accordingly.
Ideally, it would help to allocate a portion of your earnings to a retirement annuity and a unit trust. By allocating your funds toward a retirement annuity, you can reduce your taxable income and get the benefit of further savings. The unit trust portfolio can be structured with underlying funds targeting long-term capital growth and have the peace of mind that the product provides liquidity and flexibility.
If income is not an issue, reducing your living annuity income or pension fund income to the minimum of 2.50% would be beneficial as this would leave more capital exposed to further 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.