RA or Bond?

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^^vampire^^

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I'm currently paying occupational rent and with levy etc I have budgeted R7000 p/m

I have a bond of R544 000.00 which I will be paying about R4600 per month for 20 years (bond repayment should start in a month or two).

I also want to start contributing to an RA of R8000.00 per month.

Would it be better to pay the bond at R14000 p/m and then when the bond is paid (just under 4 years) start an RA or would it be better to pay R6000 into the bond each month and put R8000 into the RA each month?
 
I'd reduce the amount of the RA a tad, and pump more into the bond.

Remember with the RA comes a tax saving.

However I usually never take my own advice when it comes to finances so don't ever take my word :p
 
What is the interest rate on the bond? This has is a major factor to take into account.

Each case is different. I create a series of youtube videos on this very subject. Have a look at all of them please as the build on top of each other. Link to videos

If you have any questions let me know.
 
My personal opinion - I would definitely ensure that I am saving the recommended 15% of my income for retirement. This would be the RA (if you have no other retirement savings like a retirement fund) and then anything you have left over into the bond.

It is good to see saving for retirement as mandatory.

That said, ensure that the RA you are buying is one of the new generation Unit Trust or ETF based RA's, which allow you to stop/start contributions and choose or change the underlying Unit Trusts or ETF's at will with no penalties. I would also diversify a bit and put a few grand into other investment vehicles, like shares, Unit Trusts (Allan Gray/Coronation) or ETF's (Satrix, RMB etc.)

Eggs, basket etc.
 
YingYang said:
I'd reduce the amount of the RA a tad, and pump more into the bond.

Remember with the RA comes a tax saving.

However I usually never take my own advice when it comes to finances so don't ever take my word :p
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There is only a tax benefit on the RA up to one third of your salary... so don't put too much in to the RA, obviously depending on how old you are and how much you owe on the house.
I'd pump the money in to the bond first, put a lot less in the RA.
 
There is only a tax benefit on the RA up to one third of your salary.
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Please explain this statement. The tax benefit would be equal (15% of non-retirement funding contributions) x (average tax rate).
 
Interest rate is 8.0% and should start in July or August
Will be 27 in November

Is the RA contribution still 15% or has it gone up to 22.5? i remember reading that they wanted to change it to 22.5% this financial year.

Either way I have 14k per month to split for bond (normal repayment is 4600/4700 p/m) and RA, i'm trying to get the best balance of paying the bond vs the tax incentive and saving for retirement.

Thanks for the replies so far :)
 
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Surv0 said:
RA is based on compounded interest etc.. the later you start paying RA the less you effectively earn from it...
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I've been trying to calculate this effectively as I can pay off the bond in 4 years or so with 14k p/m and when im 31/32 can put R14000+ into my RA every month or I can pay 6k into bond and 8k into RA.

Either way putting that extra R1400 to make up the 6k instead of just the base R4600 already chops it down from 20 years to 12 years :)
 
I would recommend investing only up to the 15% of salary limit for the RA. After that you get no tax benefits and it makes a lot more sense to invest that into more discresionary investments like your bond, unit truts, etf ect. You are young and this route will also allow you to invest more aggressively if you want to. Regulation 28 will limit the risk profile of your RA.

Also you will have access to your investments which you will not have if you put everything into the RA. You never know when a great opportunity could come your way or if you fall on hard times, and in these cases having more liquid assets is a good thing. The negative aspect is you need to be more disciplined over the long term and not touch your savings unless it is life or death.

I would also recommend using some of that cash per month to establish a very liquid (money market fund, Capitec etc) emergency fund equal to at least three times your gross monthly salary. This protects you in the case of sudden illness or loss of income.

Also the 22.5% of your salary change will come into effect from next financial year, not this one.
 
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AlmightyBender said:
I would recommend investing only up to the 15% of salary limit for the RA. After that you get no tax benefits and it makes a lot more sense to invest that into more discresionary investments like your bond, unit truts, etf ect. You are young and this route will also allow you to invest more aggressively if you want to. Regulation 28 will limit the risk profile of your RA.

Also you will have access to your investments which you will not have if you put everything into the RA. You never know when a great opportunity could come your way or if you fall on hard times, and in these cases having more liquid assets is a good thing. The negative aspect is you need to be more disciplined over the long term and not touch your savings unless it is life or death.

I would also recommend using some of that cash per month to establish a very liquid (money market fund, Capitec etc) emergency fund equal to at least three times your gross monthly salary. This protects you in the case of sudden illness or loss of income.

Also the 22.5% of your salary change will come into effect from next financial year, not this one.
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+1. Good advice.
 
It's worthwhile to put extra money into the bond, but don't delay the RA completely.
Also consider that you may move to another place in a few years, as your life progresses and if you want to rent your current place out at that time, the interest portion on the remaining bond repayment is tax deductible.
 
Cool thanks for all the advice.

Think I'll go the 15% RA route and do the rest into the bond. When RA goes up to 22.5% then I'll adjust it accordingly.

I had to buy a car as my other one conked out so I had to put my liquid savings into that.
Right now I'm putting the cash into my 5 capitec accounts, each at R9999 for max interest rate which is my liquid reserves.

I also contribute 2 x R500 into unit trusts each month so I guess that's semi liquid - i just let these go and never think about it. Should be a nice amount for a rainy day. Also contribute R1000 p/m for a yearly holiday :)
 
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^^vampire^^ said:
Cool thanks for all the advice.

Think I'll go the 15% RA route and do the rest into the bond. When RA goes up to 22.5% then I'll adjust it accordingly.

I had to buy a car as my other one conked out so I had to put my liquid savings into that.
Right now I'm putting the cash into my 5 capitec accounts, each at R9999 for max interest rate which is my liquid reserves.

I also contribute 2 x R500 into unit trusts each month so I guess that's semi liquid - i just let these go and never think about it. Should be a nice amount for a rainy day. Also contribute R1000 p/m for a yearly holiday :)
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Good stuff :)
 
AlmightyBender said:
I would recommend investing only up to the 15% of salary limit for the RA. After that you get no tax benefits and it makes a lot more sense to invest that into more discresionary investments like your bond, unit truts, etf ect. You are young and this route will also allow you to invest more aggressively if you want to. Regulation 28 will limit the risk profile of your RA.

Also you will have access to your investments which you will not have if you put everything into the RA. You never know when a great opportunity could come your way or if you fall on hard times, and in these cases having more liquid assets is a good thing. The negative aspect is you need to be more disciplined over the long term and not touch your savings unless it is life or death.

I would also recommend using some of that cash per month to establish a very liquid (money market fund, Capitec etc) emergency fund equal to at least three times your gross monthly salary. This protects you in the case of sudden illness or loss of income.

Also the 22.5% of your salary change will come into effect from next financial year, not this one.
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+2 Good Advice
 
Initially when we first got our home loan we put only 10% of each our salaries (20% of total household) into our RA's and then invested the other 10% straight into our bond, to strike the very compromise that you are looking for and it worked very well so far.

Since then my wife changed jobs and got a mandatory pension fund package and so we stalled her RA at the original values so as not to receive penalties.

So from the start we were paying about 150% of the monthly instalment especially since the interest rate also dropped shortly after we took our bond and each year I fight to get the rate lowered even further.

As we receive increases and bonuses or tax return benefits we've dumped money into the bond on a lump sum basis of a couple of thousand here and there and we are set to pay it off in only six years of the total 20 year period if all goes according to plan.


So I would definitely say go for the RA as the tax benefit but as AlmightyBender said it's also pointless above 15%. We initially compromised on 10% purely because we couldn't afford 15% and boosting the home loan at the same time.
 
Is saving above the 15% of non-retirement funding income in an RA really that bad and pointless(as stated above)?

Sure, you might not get that maximum tax return benefit but you still get those tax free investment returns and growth in the RA and the extra paid in carries over to when you retire.

And dont tell me about Regulation 28, you can still be 75% in equity and 25% in property* (and property funds make up 7 of the 10 top performing units trust fund going back 5 years) and that is aggresive enough.

*yes, there are possibilities that equity funds have a property component but its something you can research and play around with, especially if you are contribiting R2000pm or more
 
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Is saving above the 15% of non-retirement funding income in an RA really that bad?

Sure, you might not get that maximum tax return benefit but you still get those tax free investment returns and growth in the RA and the extra paid in carries over to when you retire.
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In my opinion its a timing issue. To use a extreme example, If you have 20 years till you retire and contribution R1,000,000 over the limit, since this R1,000,000 doesn't grow at all but remains stagnate (from SARS perspective, not the investment growth). The real value of the R1,000,000 in present value terms in 20 years time is only R311,000.

So going balls to wall with a RA does have a relatively small tax incentive(R311,000 at retirement), but the opportunity cost here is not having access to that R1,000,000 till retirement.

Its a planning issue. No wrong answer, no right answer.

And dont tell me about Regulation 28
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Yip, i think the FSB missed the boat here in terms of what they were trying to achieve with Reg28.
 
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