Retire: Understanding your statement

I recently asked a close acquaintance if there are any retirement concepts or jargon he doesn’t understand which I should break down in this post. His answer was simple. “I don’t know anything. I know I have one [a retirement annuity], I don’t know how much I’ll get when I retire and I don’t know if it will be enough.”

Put off by the financial industry’s heavy jargon and fine print, many people are in this boat. So let’s get rowing.

How to know what you don’t know

Let’s start with what we don’t know. We don’t know how long we will live and what the world will look like when we reach our retirement age. That’s up to life.

We do know that we would like to maintain our standard of living once retired and that we can work towards that goal during our working life.

So how much would your future-self need to retire well? We’ve discussed the rule of 300 in the Know Your Number blog. This simple calculation will give you a very clear goal to work towards.

Knowing how much you need is the first step. To calculate whether you’re on track with your current monthly contributions is the next step. This online calculator by 10X is charming and simple.

Under the hood of your monthly investment statements

Next up is knowing how to read your investment statements. If you invest in a retirement annuity (RA), take a closer look at your investment statement the next time it lands in your inbox. Knowing what every abbreviation, acronym and initialism means, makes it less daunting. It also enables you to optimise your retirement planning. Why? Your provider is required by law to be 100% transparent with regard to the fees you’re paying. The industry average for fees is around 3%, but modern retirement annuity providers can charge under 1%. If your provider charges more than that, you need to challenge that number or move your RA. This small act will save you hundreds of thousands in the long run.

To understand fees better, you need to take note of the following two initialisms: TER and EAC.

TER stands for Total Expense Ratio. It refers to the cost of managing the fund in which you’re investing. It’s shown as a percentage of the average net asset value of the portfolio (the average net asset value being the total value of the portfolio’s assets less the total value of its liabilities.) The TER is calculated over a period of three years (where applicable). The TER displayed on your statement is shown as an annual rate and is calculated to the most recently completed quarter.

EAC stands for Effective Annual Cost. It’s made up of four components: Investment Management Fees; Advice; Administration; and Other. Under Investment Management Fees, you’ll find TER and transaction costs. If you made use of a financial advisor, their fee will be listed under Advice. Administration refers to administration costs and is calculated based on the total market value across all investment products. Other refers to other costs, such as penalties, and is not always applicable.

If you’re looking for an overall number of how much your RA is costing you, the EAC will provide you with a clear overview of what you pay every year. Remember, this is a percentage of the money you’ve put away. The higher the percentage, the more of your retirement money is going towards the product provider, instead of your pocket.

Deciphering transaction histories

Your statement also breaks down the income distribution of your investment. Let’s take a look at some of the words you might encounter:

Dividend: This is part of the profit you receive as a shareholder. We also dedicated an entire blog to understanding dividends.

Dividend (foreign to be taxed – dual listed): This means that one of the companies you’re invested in, is listed on two stock exchanges: The JSE and an international stock exchange. When dividends are declared for a product that is Regulation 28 compliant, it’s only taxed in the foreign country.

Income From REITs: REIT stands for Real Estate Investment Trusts. This means you own shares in a company that owns and operates in local real estate. Income from these investments is usually added to your income tax. However, within a Regulation 28-compliant product like an RA, you don’t pay taxes until you take the money out.

Interest (Foreign): Interest earned on foreign investments is listed in this section. Remember, all South African retirement products must be Regulation 28 compliant. This means that up to 30% of your portfolio can enjoy exposure to foreign assets, which is why you’re earning foreign interest.

Interest (local) subject to SA interest withholding tax: Tax on interested earned is paid directly to SARS by the fund manager.

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