Lessons from a trader, saver, investor and retiree – part 2

Carina JoosteLatest, Retire

Colourful skittles in the sky at dusk


In our previous blog, we learned some valuable, straight-from-the-horse’s-mouth, lessons from current retiree Senior Stan (not his real name, obviously…). This week we’re diving into the details of his actual retirement, which kicked off when he was 62 years old. In this post we’re going to look at how he invested his savings, his approach to being tax-smart, and his income provision strategy.

Making the most of every opportunity – at every point

When Senior Stan joined the workforce, SARS allowed retirement fund contributions in arrears, of R1750pa in addition to any current year retirement fund contributions. “At the time I only had access to funds from the insurance industry and had a yearly debit order that I allowed to run to maturity for the lock-in period of 35 years.” Upon maturity,  he did a Section 14 transfer to a unit trust-based retirement annuity (RA), initially with Sygnia (Skeleton Balanced 70 Fund) and later on with 10X (Your Future Fund).

He also preserved his company pension on changing jobs by transferring it to the same RA fund.

Lesson: “A family member however, contributed a much larger monthly premium towards an insurance-based RA. Being mindful of Time Value of Money concepts, I figured that the better return prospects and lower fees of a unit trust-based alternative, would more than offset the large penalty imposed on termination.”

From RA to LA

On retirement, he converted his RA to a living annuity on the Prescient platform. This change was necessary because one of his RA providers had reached their offshore capacity and so couldn’t accommodate Stan’s need for a larger offshore allocation. “The Blue Quadrant fund was not even offered among their living annuity (LA) funds list but they obliged and included it.”

He then invested in the Prescient Core Global Equity Feeder Fund A2, Fairtree Global Equity Prescient Feeder Fund A3, and Blue Quadrant Worldwide Flexible Prescient Fund A—and withdrew the R550,000 tax-free amount which he invested in one of his preferred income funds.

TaxSmart: “A few advisors create the impression that the strategy of channeling the proceeds from a living annuity to another retirement annuity leaves the investor in a tax-neutral position. This is not always the case and depends entirely on your taxable income, so do the sums carefully so you are not left with a cash-flow nightmare.”

To illustrate this important point, Senior Stan shared the following example:

2.5% drawdown from the LA R300,000
Total taxable income* R500,000
RA deduction for tax purposes in current year = 500,000 x 27.5% R137,500
Amount carried forward to subsequent tax years = 300,000-137,500 R162,500

*(incl. income from discretionary investments)

“You have added (300,000-137,500) R162,500 to the current year’s taxable income so consider your cash-flow when adopting this strategy, as this may also push you into a higher tax bracket in the current year. Granted, you will get the tax relief in subsequent years which may not be that great.”

Enter retirement income

Stan’s draw-down rate on his entire portfolio comprising retirement and discretionary funds is about 1%. “The intention is to use my retirement funds for legacy and estate planning purposes, as retirement funds are one of the few remaining means available to South Africans to achieve this cost-effectively.” That said, as current legislation mandates a minimum draw-down of 2.5%, he makes a withdrawal at the beginning of each year and immediately channels these funds to an RA with Momentum.

“I’ve been quite aggressive in the selection of these funds due to my low draw-down rate and not living off the LA. For someone looking for more risk-profiled RA/LA funds Prescient, Fairtree, Sygnia and 10X AM have a good spread of funds with good track records.”

A closer look at our retiree’s income provision strategy

Senior Stan’s income provision strategy is guided by a “watered-down version” of Harold Evensky’s bucket strategy:

  • Now (safe and liquid),
  • Soon (conservative with dividend-paying equities),
  • Later (volatile with high-earning products).

“With a draw-down rate of 1% I could easily invest my entire portfolio in a low-risk dividend-paying or pure equity fund.  But this would be quite boring for someone like myself. To this end, I have all the interest and dividend income from my discretionary investments paid into my bank account. I also have investments in the following income funds:

  • Fairtree Flexible Income Plus Prescient Fund A1
  • Prescient Income Provider Fund – A1
  • RSA retail savings bonds – locked in for 5 years at 11.25%

TaxSmart: Any income shortfall is addressed by liquidating his unit trust funds. “This makes me liable for capital gains tax (CGT) only, which is significantly lower than tax on interest income. If you are on the maximum marginal tax rate of 45% then the maximum CGT you would be paying is 18% (45 x 40%).”

Is there anything he would have done differently?

“I enjoyed investing directly in shares so I would still do this. My early childhood experience with money taught me valuable lessons on saving and providing for a rainy day. All things considered, I’m happy with my investment/retirement planning journey. I would have invested more efficiently if I had the wide universe of local and offshore funds currently available. However,  I had no option but to use the high-cost, opaque investments by the large insurers available at the time. Notwithstanding this, I persevered and still came out ahead.”

Senior Stan has enough capital to enjoy a fairly carefree retirement, but he did mention that age and health issues are starting to present some challenges. “If I knew the day I would cease to exist, early on in life, my financial planning would have been quite simple: Spend until the last day and die a pauper. My early working life did not project my current financial standing with any degree of optimism. It’s only been through living a very frugal life of self-sacrifice, hard work and some good investing habits, that has led to my current situation. If I could do things differently I would like to have traveled more, with more leisure time along the journey to financial freedom.”

Retire blog

Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, Carina Jooste responds to common retirement questions, ranging from which products are best suited to different circumstances to efficient tax treatments.