We all know the power of time and we also know that tax-free investing is great because you pay no tax on the dividends or profits.
But here’s a wild stat putting both to really powerful use.
One-off tax-free contribution
Say a child is born today and you put R36k (the current annual limit) into a tax-free account for them.
When they’re sixty-five they’ll have almost R3million and that will generate (using the 4% rule) some R117k a year tax-free – in today’s money (*see my assumptions at the end of the article).
Single tax-free deposit of R36k over 65 years
Now nobody retiring on that, but let’s take it a step further.
Tax-free contributions up to lifetime limit (R500K)
Let’s put R36k a year into the new child’s tax-free account every year until the lifetime limit of R500k is reached (about 15 years) and the chart below shows just how this blows up into a vast amount of money.
Tax-free deposit of R36k until lifetime limit over 65 years
Now at age sixty-five the tax-free account is worth over R27million and again using the 4% rule that generates some R1.1million a year. Now that’s almost R100k a month tax-free. That is very much enough to retire on.
But there’s more.
Seeing as the child’s retirement was sorted before they even left school, during their working life they never need to save for retirement.
They could spend those retirement savings, they could use it to support their parents in retirement or just take a lower-paid job. Heck, they could save like crazy and retire at forty. The options are endless and deeply empowering.
Problems? Well, two really.
It’s honestly the best gift you can give your children but boy is it tough to do 😩. A family of 4 needs R144k a year. Plus you trying to sort out your own retirement at the same time. If you can afford this, your child will be set for life just with forking out R500k over 15yrs https://t.co/N50kzjviT5
— Melisha (@Melisha_Empire) September 30, 2022
Firstly children are already expensive and now you need to find another R36k a year per child and you’re doing your own tax-free contributions.
THIS! 🙌
I would just add that you still need to show your kids how to manage their money. They must not touch that TFSA & cash it out to buy a flashy car when they are 18! https://t.co/RfkHgpoyxa
— Moms 💖 investing (@mommy_moneyza) September 30, 2022
Secondly, at eighteen the money is theirs and they could blow it on anything they wanted. But you have those first eighteen years to make them money smart.
Assumptions;
7% real return. In other words, return less inflation.
This means that the money values are in today’s spending power.
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