Q: I am 40 years old and have R1.5 million that I would like to invest for retirement. What kind of investment would you recommend? I’d like to keep fund costs as low as possible, and gain maximum returns with minimum tax implications.
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Saving for retirement can incorporate a variety of products beyond retirement-specific products. We would suggest considering the following products:
Retirement annuity (RA)
Tax-free saving account (TFSA)
Please note the attributes ascribed to the products above are not exhaustive.
Your blend of products should support your investment objectives whilst taking into account tax and liquidity. You can hopefully see that each product has its own advantages and disadvantages and it most often works best incorporating more than one product.
It is important to have a blend of both tax-efficient and liquid assets in a portfolio. The decision to invest in a unit trust or via an endowment, for a long-term investment, comes down to your average tax rate and whether it is above or below the 30% levied in an endowment.
The one ‘product’ I haven’t included above, but that certainly deserves attention, is an equity portfolio. The broad treatment is the same as I described under ‘unit trusts’. You are also able to hold an equity portfolio in an RA or an endowment.
Now that we have covered products we can move on to discussing the underlying investments – the ‘stuff’ that is going to generate the returns over time.
Quick aside, if you don’t already have an emergency reserve you should consider holding onto a bit of your capital to cover this base, possibly in a call account, to avoid dipping into your long-term assets if something unexpected crops up.
You have a long time until retirement, assuming you retire at 65, and are thus able to take on reasonable equity risk. Common practice, which I agree with, says you should have around 75%, or more, of your portfolio in equity and somewhere between 25% and 50% in global assets. These allocations need to be considered along with:
The last point we need to cover is costs. There are three costs that you may need to consider. Those of the:
1. Financial advisor
3. Fund management
While costs can be a sensitive topic, the bottom line is that you need to understand what you are paying, and to whom.
1. Different financial advisors have different fee structures. You should be made aware of this, and all other costs, before investing your money.
2. If you end up using a product like an RA, the actual product provider is likely to charge a fee. As the product provider does all the administration, the fund manager can often offer a cheaper fund class than going direct to the asset manager, often offsetting most or all of the product fee.
3. Fund management costs can vary due to management style, such as active- or passively-managed assets, as well as the fund’s fee structure being a flat or performance-related fee. It is possible to find active management with good performance and cost efficiency.
Of all the decisions to make, your asset allocation decision is the most important. Fees are of course critically important, as your return is reduced by costs. Personally, I do not believe that doing things on your own and only using passive funds is the panacea. You should have a blend of management styles in your portfolio. Using a good advisor can add great value to long-term results and cost management.
To end off, I did a rough calculation to see what your sustainable drawing at retirement could be if you wanted to, at a minimum, maintain the real value of your income and capital. The assumptions are:
The outcomes are:
If you were not worried about drawing into or depleting your capital your sustainable income would be quite a bit higher. Either way it is scary how much you need to save to retire somewhat comfortably.