Retirement 101

Creating your long-term saving goals (this is retirement for many people) is not something that you can simply decide on the spot – and often, these goals may change over time. Before you even get into some of the technicalities of long-term saving strategies, as we will cover in this blog, you need to know why you’re saving – and what you’re saving for. When you know the why, the how is much easier.

This should become an ongoing conversation with your financial advisor – one blog simply cannot cover it all – but hopefully it will help you on your journey!

Given the advances already made in the fields of technology and medicine, we are living longer than previous generations, which means that a balanced and robust portfolio will make provision for a long and happy retirement after you hang up your work boots.

Delaying saving for retirement is not uncommon, as other life costs can easily seem more important when you are young. Even those who are forced to save — as a result of a compulsory deductions at work — still might not have enough when it comes to retirement age.

It’s not only how much money we save that counts, but also when we start saving. Your retirement should be a time when you finally get to reap the rewards of decades of hard work. However, if you wish to enjoy these golden years in comfort, it’s best to start saving when you’re young, as the earlier you start, the less you need to put away each month.

Many people only start saving at the age of 28, rather than when they first start work. And there are even more who wait until their thirties, or later still. The problem is that if you start later on in life, you’re not just faced with trying to catch up on the amount that you could have been putting aside before, but you also need to make up for the compounded returns that you’ve missed out on. The earlier you start saving, the more you can benefit from the market contributing to your retirement through the power of compound interest.

For example, if you start saving ZAR5,000 a month at 25 years old, at an
annual average of 6% return, you’ll have more than ZAR7-million by the time you hit 60.

However, if you start saving the same amount a decade later, you will only have ZAR3.46 million by the age of 60. You’ll, therefore, need to increase your savings to ZAR10,000 a month to reach ZAR6.9 million in your 25-year investment horizon.

How much will you need

The first step towards saving for your retirement is to figure out how much you will likely need. Most retirement experts in South Africa advise that you’ll probably need to replace about 75% of your current income to retire comfortably, assuming you don’t have a home loan or any other large debt by that age. Peter Doyle, the former president of the Actuarial Society of South Africa, explains that “12 times your annual salary is likely to buy you a financially comfortable retirement.”

However, in recent experience we are finding that those wanting to retire need about 90% replacement ratio, especially as medical expenses are likely to rise as you get older.

To achieve a comfortable retirement, it is widely recommended to save at least 15% of your gross income over a 40-year career if you start saving at the age of 25. However, a late start or early retirement would obviously require a much higher savings rate.

How to save

When it comes to saving for retirement, you need inflation-beating investments and as much time as possible to benefit from the compound interest.

There are various retirement plans that you can choose from. The most tax efficient way of saving in South Africa is arguably to invest the maximum percentage of your salary possible in your company’s pension scheme and/or a retirement annuity (RA).

The good news is that contributions to a retirement annuity, which you can invest in through a financial services provider; and/or pension or provident funds, which are provided by employers, are tax deductible up to a certain amount (you can contribute up to 27.5% of your gross remuneration — up to a maximum of ZAR350,000 per year — to a pension fund or RA). And, as you can save pre-tax with these vehicles, you can benefit from the compounded growth on a larger amount.

A major benefit of an RA is that all growth is completely tax-free, but it is important to review all the costs, as life-linked retirement annuities can be expensive. If you do wish to invest in an RA, it’s advisable to select one that has no penalties or obligation for monthly contributions. The best ones don’t have any upfront fees and operate on a pay-as-you-go basis.

More flexible retirement products are usually unit trust-based, as these allow you to decide when and how much you want to contribute. Generally speaking, a balanced unit trust offers a good savings option for retirement, as it should provide adequate equity exposure for long-term growth, as well as more stable asset classes that can mitigate the investment risk.

You can also supplement your savings by investing in a tax free savings account (TFSA), an investment property, or trading in shares. A tax-free investment could be a suitable additional investment, as it still offers tax benefits without some of the restrictions that can come with a retirement annuity. However, it does have its own restrictions — a TFSA currently only allows for tax-free savings of ZAR33,000 a year, and a lifetime limit of ZAR500,000.

How to play catch-up

It’s worth aiming to save at least ZAR15 of every pre-tax ZAR100 if you have a 40-year timeline. However, if you want to retire before the age of 65, or put off saving until your thirties or later, then you will need to increase that saving rate. If you start saving at age 30, you will likely need to save 20% of your gross income, while starting at 40 years old will mean you will need to save 42%.

If you’ve left it late or realise you need more savings to retire comfortably, the easiest way to solve this problem is to save more (saving an extra ZAR4,000 a month on a ZAR40,000 salary will make a big difference). If you are willing to cut back on expenses, find a way to generate extra income, inject part of your annual increase or bonus, or pay off your debts as quickly as possible, then invest the freed up money. Essentially if you clean up your budget, and get into the habit of saving regularly, you can work towards a healthier retirement fund.

You may also need to be more aggressive when it comes to investing. A widely accepted rule of thumb is to subtract your current age from 100 and invest that percentage of your portfolio in equities, or many people now follow the ‘110 rule’ as we are living longer. So, if you’re 30 years old, you’d invest 80%, and you’d decrease this to 70% at age 40 to also decrease the risk in your portfolio as you get older. However, if you don’t have enough saved for whatever reason, you may well wish to increase the equity portion of your portfolio. Don’t hesitate to arrange a meeting to discuss this so you can make an informed decision and not take unnecessary risk.

Another thing to bear in mind is to preserve your benefits rather than take the cash if you are offered withdrawal benefits or change jobs. Furthermore, although you can also access your savings in preservation funds and retirement annuities at age 55, it’s best to again keep your money invested. Don’t be tempted to use your money for anything that is not essential, as you should be adding to your savings at this stage, rather than eroding them.

Saving for retirement can seem a complex task, but it doesn’t have to be if you do a bit of research and arrange a meeting to discuss the different retirement plan options available. Building a diversified retirement portfolio will depend on your assets, your risk profile, your age and your financial goals, but you’re on the right track once you have picked a strategy that you trust, and have established a suitable retirement portfolio. This should then be reviewed at least once a year — even quarterly — so you can track whether you are saving enough and make adjustments if need be. This can be done at the same time as your tax planning so you can ensure you are taking full advantage of all the tax breaks each year.

(blog ideas were added to from fin24.com)

Financial lessons from Rich Dad, Poor Dad

In his bestselling book, Rich Dad, Poor Dad, the author, Robert Kiyosaki, explains the fundamental differences in the way his two fathers thought about money — his real father who was ‘poor’ and the father of his best friend who was ‘rich’, despite both earning a good salary. From studying their journeys, he realised that your wealth can depend more on your actions than the money you earn. He surmised that it is, therefore, important to first change your attitude about money because your thoughts lead to your actions.

Here are 6 fundamental financial lessons from the book that can help you to build wealth and retire in comfort.

1. Manage your money

Many people are able to make money, but not everyone learns how to manage it properly. Financial intelligence starts with learning the difference between assets and liabilities. By enhancing your savings and tracking your expenses, you can become aware of your spending patterns and ensure that you have more money coming in than going out, which is what will make you richer.

Many people make the mistake of thinking that earning more money will solve their financial problems, but this could only serve to compound them if your outgoings increase exponentially too.

2. Make your money work for you

A main point that Kiyosaki makes is that the lower and middle classes work for their money, whereas the wealthy have money work for them.

Learn how money works, then work out how to make it, independent of a paycheck. Look into how you can generate more income by investing your money wisely. And don’t give the financial power to your employer, but rather keep the power by taking control of your money and making it work for you.

3. Be brave and don’t be scared to fail

Most people never win because they’re afraid of losing or failing. However, we often learn and improve by making mistakes, and failure is often part of the process of becoming successful.

You don’t have to be ridiculously intelligent to have financial success. While Kiyosaki’s father had multiple qualifications, his best friend didn’t have a proper education. A degree cum laude won’t necessarily make you wealthy if you don’t have guts and an understanding of how money works too. Generating wealth sometimes involves taking risks and dealing with a level of uncertainty. The trick is to be clever about when and how to take risks, by being savvy and learning from your experiences to assess a situation, rather than dive in blindly. The path to wealth often requires you to leverage money to mitigate your risk and maximise your profit.

4. Become financially intelligent and literate

The biggest cause of financial trouble is ignorance because this isn’t taught in many education systems or societies. Financial terms can be complex and daunting, but you can develop financial intelligence by reading about accounting and investing, and keeping informed about the markets. Kiyosaki believes that the cause of so much suffering is due to a lack of financial education. Courage plus technical knowledge will take you far.

5. Train your mind to look for opportunities

Look for creative solutions to any money problems. Maximise your options and work out what you can do to improve your financial position if opportunities aren’t falling from the sky. It is not so much a question of what happens to you, but the different financial solutions you can think of to turn things into opportunities.

6. Focus on assets over income

Concentrate on your net worth rather than your monthly salary. Start acquiring assets — such as stocks, bonds, or your own company — to earn you money, as opposed to liabilities — such as mortgages, loans, or credit cards — which cost you money. Build your asset column first, then buy any luxuries with the income generated from these.

According to Kiyosaki, you can measure your wealth by the number of days you can live off the income from your assets. And you can consider yourself financially independent if your monthly income from your assets exceeds your monthly expenses.

Making money is a question of mindset. Ensure you understand how it flows, and don’t hesitate to arrange a meeting if you need any help in applying these principles for financial freedom.

If you have the time – take a look at reading the book – Rich Dad, Poor Dad, by Robert Kiyosaki!

The urgency of an emergency fund

An emergency fund is a lump sum of money that is important to set aside to cover any financial surprises, such as car breakdowns, medical requirements, home repairs, vet bills, or sudden unemployment. These unexpected emergencies can be stressful, costly, and they often demand immediate payment.

You can financially manage these unanticipated disasters by ensuring you have an emergency fund to fall back on when the need arises.

Insurance can play a big part in financing emergencies, but it still does not replace the need for an emergency fund — your medical aid provider might not cover every expense; warranties come with a timeframe; and your home and car insurance policies may still require you to pay excesses.

You should, therefore, regard your emergency fund as an additional insurance policy that needs to be kept solely for emergencies, rather than dipped into for incidental expenses. Even if your income increases, it’s advisable to increase the amount you save for your emergency fund too.

In addition to the financial stability, there are other benefits to having an emergency reserve of money. Having a financial safety net can give you the confidence of knowing that you can tackle whatever life throws at you, which can help to keep stress levels at bay. An emergency fund can also prevent you from making bad financial decisions in times of crisis, such as borrowing a lot of money at a high interest rate, with fees and penalties. Having an emergency fund is arguably a necessity nowadays to save you on a rainy day from having no choice but to go into a lot of debt.

Studies have shown that many South Africans sadly don’t save enough for emergencies, and when faced with unexpected expenses, people often use credit that they can’t easily repay. Many people don’t save for emergencies because they don’t believe that something will happen to them, or they are not wholly aware of all the costs involved if the unforeseen does happen. Emergency savings are often not given priority as people tend to put their money towards short-term gratification or long-term goals. It is also understandably easier to save for positive events, such as a holiday or retirement, rather than prepare for the negative.

How much to save

While anything is definitely better than nothing, most financial experts recommend that you aim to grow an emergency cash reserve that would be large enough to cover all of your expenses for three to six months. The exact amount may depend on a few variables, so it’s advisable to arrange a meeting to discuss how your emergency fund could fit in with the rest of your priorities.

Saving for an emergency fund can require a bit of effort to achieve. The first step is to figure out how much you spend each month — accommodation, food and transport are likely to take up most of your budget — then multiply that number by three and you can set that amount as an initial three-month target.

How to save

There are many ways you can approach saving for this goal. For example, cutting back on the amount you spend on eating out can help to fund your savings plan. The key is to add to your emergency fund at regular intervals, and you can do this by dedicating a feasible amount from your paycheck and treating it like any other recurring bill that you need to pay each month. Saving a raise, bonus or tax refund, will also give a healthy boost to your emergency fund, as will downgrading your mobile phone service or trading in your car for a cheaper model.

If funds are a bit tight, you can start simply by emptying your pockets each day or tipping yourself whenever you eat at home, and stashing the change in a jar. If you manage to dedicate ZAR50 per day to your effort, you’ll have ZAR18,250 by the end of the year, which will add up to ZAR91,250 in five years!

This is when it helps to have a financial planner/coach helping you to create the saving behaviour change – and then keep to it!

Banks offer a range of savings accounts that may appeal to you. However, you should discuss whether there are any notice periods, possible penalties or minimum deposit requirements before going ahead.

Alternatively, you may wish to put your emergency savings into a money market unit trust fund or a high-interest savings account, as they are low-risk investments and accessible (although harder to dip into than a jar, your funds can be accessed in between 24 to 48 hours with no penalties), and you can also earn an interest rate on the money, which can be reinvested to keep up with inflation. A low-risk fund, however, does still carry the opportunity cost of putting your money in an investment that could be earning a higher return in a riskier investment.

Funds with a higher risk profile, such as a low-equity multi-asset fund or a bond fund, will generally earn a higher return than a money market fund. And you could select these funds for emergencies that are prone to above-inflation price increases, such as medical expenses. However, do bear in mind that if you choose this option, there is a risk of capital loss, as these funds are more volatile than money market funds. It is, therefore, advisable to invest for a longer term to reduce your chance of losses. You’ll find that each unit trust fund has a recommended investment period so that investors can maximise the benefit of that fund.

The amount of money required to fund a proper emergency fund is significant but necessary as we live in uncertain times with an uncertain economy. If you don’t have a rainy day fund already, start saving now and put aside whatever you can, even if it isn’t much. It will allow you to weather those rainy days without running up unnecessary debt. Be prepared — save towards an emergency and don’t hesitate to discuss how best to allocate your savings to appropriate investments.

Recent change to TFSAs

A National Treasury regulation that came into play on 1st March 2018 now provides South Africans with more flexibility when it comes to investing their money in a tax-free savings account (TFSA).

According to an article published on Business Tech, South Africans will be able to switch as much as they want of their money in a TFSA between financial service providers at no additional cost. They can do this up to a maximum of twice per year, and this will enable investors to adjust their tax-free investments to best suit any changes in their personal circumstances.

On 1st March 2015, the government first introduced tax-free savings accounts to encourage more South Africans to start saving, as there was found to be an exceptionally poor savings rate in the country.

Tax-free investments allow you to save without incurring any tax on the growth of your investment. This means that you don’t have to pay any tax on interest, capital gains tax (CGT), or dividends. Investors can invest up to ZAR30,000 each year (or ZAR2,500 per month) tax-free, until they reach their lifetime limit of ZAR500,000. However, do be sure to stay below the annual ZAR30,000 limit, otherwise you will incur tax penalties.

If you save the maximum annual amount consistently, investors can take advantage of the long-term benefits of compound interest and should, after just less than 17 years, have saved ZAR500,000 as a tax-free investment — in addition to compounded capital growth, interest and dividends.

Tax-free savings are for anyone with a taxable income, so it’s not worth putting a tax-free savings account in a child’s name if you wish to save for their education. Furthermore, be careful not to donate more than ZAR100,000 a year to children or grandchildren as a tax-free investment, or you will be liable to pay donations tax.

Make the most of a TFSA

To really reap the benefits of a tax-free savings account, it’s advisable to try to reach the ZAR500,000 limit as soon as possible, after which point you can watch your money grow with the power of compound interest for as long as possible. While saving, it’s also not worth making any withdrawals from your tax-free accounts, as you cannot inject the amount back once it’s been withdrawn if you have already reached the annual limit.

As a holder of a TFSA, consider the following factors before you choose an investment product (be that cash at a bank; or equity-based or unit trust-based investments).

• Consider your investment goal.
• Think carefully about your return requirements and risk profile.
• Decide who will be the beneficiary if you don’t intend to make any withdrawals and would rather leave the product as a legacy.
• Reflect on whether you wish to access your money when required or if you are happy to invest it for several years.

To best grow your portfolio, it’s worth considering all the tax-free benefits for which you are eligible. And, with the extra flexibility that this recent change to TFSAs provides, it could become (if it isn’t already) a wise addition to your wealth portfolio.

Don’t hesitate to arrange a meeting to discuss all considerations so that you can select the most suitable product and asset class for your personal risk profile and your wealth portfolio.

(information was sourced from businesstech.co.za and fin24.com)

Investing Offshore

July is National Savings Month in South Africa, which is an awareness campaign spearheaded by the South African Savings Institute (SASI). The objectives of the campaign are to promote discussion about saving, raise awareness about the benefits of financial planning, and motivate consumers to be proactive with regards to their savings.

The country’s weakened currency continues to affect the price of everyday items, such as fuel and basic goods, as well as more luxury expenditure, such as vehicles and international travel.

Given that the nation’s economy is in the doldrums, it is advisable for South Africans to hedge against currency depreciation, as much of our expenditure is priced in developed-market currencies. Consequently, many citizens are thinking about allocating some of their savings to international currencies, such as the British Pound or US Dollar.

Not only does this protect assets from the Rand’s wild volatility, but it also makes international travel more accessible and predictable.

You are allowed to move a maximum of ZAR1-million offshore each year without tax clearance from SARS, and a maximum of ZAR10-million with tax clearance. The ZAR1-million would, however, need to be registered with the Reserve Bank, so you would have to make the transaction through an authorised dealer (most South African banks are authorised dealers).

Here is a brief overview of your main options when it comes to offshore investments.

1. Invest in Rand-denominated investment options

A Rand-denominated investment is one in which your investment and currency exposure is foreign, but your money does not physically leave South Africa. Your investment is, therefore, made in Rands and paid out in Rands.
Contributions to a pension fund or retirement annuity can give you offshore exposure in your underlying investment choice, as pension fund regulations stipulate that up to a quarter of your capital can be invested offshore.

Additionally, most asset managers in South Africa offer offshore unit trust funds, which are priced in Rands, although your capital is invested offshore. Not only will this give you global diversification and foreign currency exposure, but you also won’t need tax clearance to invest in these funds, and the minimum lump sum requirements are much lower than for other offshore investment options. If you don’t have much money to invest, you can always save in this vehicle until you reach the minimum requirements for alternative options of moving your capital offshore.

If you have a stock broking account, you also have the option to redirect some of your capital to exchange traded funds (ETF) that invest offshore. Again, these allow you to invest in Rands and be paid out in Rands.

2. Physically take your money offshore

This ultimately involves going through the exchange control process, opening up an offshore bank account, and sending South African Rand abroad to be converted into your chosen currency. By actually moving your capital offshore, you will never be forced to repatriate or convert the investment back into Rands.

Once the money is offshore, you can do with it what you want (within legal boundaries). You could leave it in your bank account, or alternatively choose to invest it in unit trust funds or stocks.

Do be aware that any investments offshore will still form part of your estate, so you will be liable for estate duty in the jurisdiction in which you invest. However, certain South African investment providers offer offshore endowments that eliminate the need for an offshore executor or probate. You can nominate your beneficiaries and, after your death, your investment can either continue offshore or be paid out in the foreign currency to them. Both of these options can happen separately from the estate process. There are also some beneficial tax advantages of using an endowment structure, as CGT will be paid at a lower rate and calculated using the offshore currency.

However, this type of investment would require a five-year initial commitment period, as well as quite a large minimum lump sum (circa US$20,000+), and quite a lot of onerous paperwork. It has also been argued that it is not necessarily good for South Africans to take their money out of the country, as an emotionally-charged mass reaction, which involves physically moving assets out of South Africa, could do even more harm to the economy.

3. Open an offshore savings account

Some experts advise that South Africans should turn to offshore investing, which allows you to invest in international currencies via online banking, without actually taking your money out of South Africa.

A foreign currency investment account allows you to quickly and conveniently put some of your savings into a foreign currency, while offering the freedom and flexibility to easily access your money online and move it back into Rands when you so wish.

It is free to open and maintain an account, but transactions are ZAR75, which covers the exchange control checks that are required by the Reserve Bank.

For many investors around the world, investing offshore is often a means of achieving global diversification, accessing stronger economies and alternative industries, as well as being exposed to different interest rate and inflation regimes. However, South Africans have arguably more to consider when it comes to structuring their finances, such as the nation’s political and economic stability.

There are several factors to take into account when looking to invest offshore, and your decisions may depend on your main concerns. Whatever these may be, it is advisable to consider investing part of your portfolio offshore in some capacity, so don’t hesitate to arrange a meeting if you would like to discuss your options further.

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A Retirement Savings Solution for Your Staff

A Retirement Savings Solution for Your Staff

Brought to You by Allan Gray

Did you know that Allan Gray’s Group Retirement Annuity (RA) system is an efficient retirement savings solution for your employees? Watch this video to find out more.

Video Summary

Allan Gray spends a lot of time talking to business owners about the process of establishing a Group Retirement Annuity with Allan Gray. The question they are most often asked is this: “Is It Easy?” and the answer is: “Yes”… and “No”. There are procedures to be followed; information to be collected from staff members; forms to be filled out; employees may wish to seek independent financial advice… and there is an EFT to be made.

The Steps

Each of these steps is easy and we will help your business with each one. The difficult part of the process rests with YOU and it is in finally making the decision; it is in saying, “Yes”. After that, things tend to fall into place quite quickly.

We know that:

  • to attract and retain great staff is vital to your business;
  • a sense of financial security is crucial to optimising productivity in the workforce;
  • you would like to contribute to the long-term financial well-being of your staff, while minimising the costs to your company, both in time and money spent.

Our System

The Allan Gray Group RA system is designed to allow you to achieve all of these things by allowing you to look after all of your employees’ RA contributions with a single monthly payment. And all you need is a minimum of five staff members to set it up.

When you establish a Group RA with Allan Gray you partner with a company with 40+ years of experience in looking after people’s investments. It means:

  • giving your staff control over their own retirement planning through individually owned retirement annuity;
  • having direct access to a team of experienced, knowledgeable people who are experts in their field;
  • competitive, transparent pricing and an administrative system which works simply and seamlessly;
  • and finally: having more time to focus on your company.

Speak to your RFAdvice financial advisor about an Allan Gray Group Retirement Annuity. 

Visit the Allan Gray Website

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Save for Your Retirement

Save for Your Retirement with a Retirement Annuity

Are you familiar with the term retirement annuity? Find out why it is so immensely beneficial and don’t hesitate to get in touch to discuss your options.

Video Summary

“We would all like to be able to afford a comfortable retirement one day. And yet, somewhere between the graphs and the fine print and the complicated pricing structures of the retirement funds on offer we can start to lose sight of our place in the sun. So, to keep things simple, we would like to tell you just four things about the Allan Gray Retirement Annuity (RA). And we’ll keep the graphs to a minimum.

  1. The investment is yours. An Allan Gray RA is held in your name and it moves with you throughout your working life, even between jobs and it’s adaptable. You’re able to pause your contributions if (a) you need to take extended leave (b) want to change the value of your monthly contribution or (c) adjust the structure of your investment, choosing from a range of unit trust based investments from Allan Gray. And you’re able to manage this process online, in your own time, at no additional cost.
  2. It can’t be touched by anyone, even you. A retirement annuity may not be accessed by anyone. No creditor may ever touch it. And until you reach retirement age, neither may you. Compound interest is just as miraculous as they say. Imagine that at age 25 you start saving 10% of your monthly salary, R2 500, and this contribution increases every year with 6%.

Watch the video for more.