DALL·E Retirement ninja
Dave’s saving-for-retirement journey started in a time of no internet. So when he left his first job after 4 years, he withdrew the tax-free portion and invested the rest in a paid-up annuity. A decision driven by gut feel and logic.
As Dave entered new phases of his life during the 1980s, he had to start saving for his children while paying off a bond and car. A trusted family member who worked at a bank introduced him to a financial advisor to help him navigate these obligations during a time when financial knowledge was the sole realm of industry specialists.
He subsequently signed up for a multitude of policies, including an endowment and education policy for his children, as well as a retirement annuity. Dave felt secure, as he responsibly ticked all the right boxes and managed to invest spare cash in unit trusts whenever he could.
But this is when things started to change. “I realised I was paying a fortune in tax and needed a better investment strategy…actually, I didn’t have a real strategy at this stage.”
From a gentle trot to hitting pause
At age 47, Dave decided to pause and take proper stock of his financial life. “I needed to figure out where I was and where I would like to be in the future – starting with knowing if I could retire securely when I got to age 60. Well, that was a surprise.”
As Dave could now do research online, he realised he was nowhere near on target to retire at 60. “This was a shock as I felt I was financially secure and thought everything would look after itself until I retired and all would be good.”
Close to retirement, far from financial security
Not only was Dave behind with his retirement savings, he also realised he made almost no money on his endowment and education policies after years of saving, due to the high costs and commissions associated with these products.
“After this surprise, I decided that I have to take responsibility for my own financial future. I would never invest through any broker or financial institution advisor again. I would do my own research and listen to independent financial experts, correlate the information and make my own decisions. Most importantly, I understood my position clearly and had the motivation and desire to change this.”
Course correction
During this time Dave attended an event hosted by our own Simon Brown, thinking he might learn how to play the stock market to make money quicker. “This was the most eye-opening financial presentation I ever attended. I realised that trying to invest in single stocks without having some knowledge (and a lot of other skills and information) is basically the same as playing the lottery.”
He then took his investment funds, except for the RAs and preservation funds, and bought two ETFs: the Satrix40 (60%) and SatrixRafi (40%). During this time, however, the market was dropping like a stone, resulting in Dave losing a third of his investment in 3 months. But he stuck to his strategy and didn’t panic. Additional money either went into his ETFs or RA with 10x, with annual investments earmarked for his TFSA.
“At the same time, I did two other important things: I invested as much as I could in my RA within the 27.5% tax deductible allowance. I also decided that I would only buy a car in cash and never spend more than R200k.”
Hello comfortable retirement
11 years later, Dave resigned from work at age 58 because he had enough of his job. “Fatties, this is the power that FIRE can give you.”
But as was the case when Dave was 47, he again was at a crossroads. “I now had to “properly” retire, so how do I determine my income efficiently? Although I feel that I’m relatively financially savvy, because I have learned so much over the years, I felt I needed professional help.”
Dave’s RAs were with 10x and felt that he could trust them. “They were the closest to independent that I could think of, so my thinking was that if I felt comfortable with the situation, I would allow them to help advise on my entire financial situation and not just the retirement products. I was suitably impressed, and suffice to say this guy restored my faith in financial advisors. But I still maintain to get an independent advisor if you can.”
The advice Dave received was aligned with his original thinking, and that was to utilize a combination of all his investments to provide him with a monthly income.
Following due diligence, they looked at three scenarios: Convert all RAs and leave the ETFs, or leave the RAs and cash in ETFs, or a combination of both. “There were several factors involved but the driving factor came down to tax efficiency.” Because at this stage, Dave managed to not have to pay tax since leaving the workforce.
How Dave invested his retirement savings:
Lump sum: He withdrew R550,000 tax-free and a further R220,000 taxed at 18%. He invested this in additional ETFs with global exposure.
Annuity portion: He invested the rest in an existing RA and living annuity (Dave’s wife is part of a government employees pension fund (GEPF), so she will get a fixed income once she retires. This influenced his decision to invest in a living annuity).
Drawdown strategy: 2.5% for minimum tax, maximum growth
Other sources of income upon retirement
- No debt except bonds on two rental properties. “The rental income is minimal, but the capital growth is good.”
- Money market (emergency fund and part of monthly income)
- RSA Retail Savings bond at 11.5% of which he takes the monthly interest
- TFSA (comprising global and S&P500 ETFs) in which he invests the full tax-free allocation each year
Should there be any shortfall due to fluctuations in interest, dividends or capital gain, he leans on his ETFs to fill the gap.
A tax-clever approach to investments:
- Uses local interest income exemption on the first R23,800 interest income received from his RSA Retail Savings bonds.
Note: Interest is not always consistent
- Uses dividends received due to dividend withholding tax (DWT)
Note: Dividend income is not always consistent
- Uses annual capital gains tax (CGT) exclusion R40k and inclusion rate of 40%
Note: Capital gain is not always consistent
“One needs to dis-invest the capital amount responsible for the capital gain amount you want to trigger.”
- Uses capital from non-retirement investments to contribute towards his existing RA for tax benefits
Dave’s investment priorities:
- “Make sure you have a retirement annuity(s). The focus here should be on cost – aim for 1% (TER) or below per annum (many are 2% to 3%).
- Get rid of all debt or reduce it as much as possible.
- Cash for emergencies. This could be a money market or something that you can access immediately or within days. The rule of thumb is a minimum of 3 months income but preferably 6 months.
- Tax-Free Investment Account (TFIA). This is a must before any other savings/investment vehicle. The current limit is R36k per annum (March to end Feb).
- Equities (i.e. ETFs).
- Property investment. In terms of priority, this is interchangeable with an ETF investment, but it would be great if you have both.
- RSA Retail Savings bonds. These are long-term savings vehicles that have a pretty high return/interest rate.”
“I’m more than happy with my approach. Although I think there are many things I could have done better and still can do better, but what I did is working well for me. What I’m most happy with is that I took charge and did something early enough, although I should have done it earlier.”
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.