true for 20 years.
I'm quite interested in how to change this structure to account for someone retiring at below age 45 to live for far more than 20 years, ie highest chance of indefinite, say 60 years, such that they never reach 0 balance.
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- Thread starter shadow_man
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true for 20 years.
I'm quite interested in how to change this structure to account for someone retiring at below age 45 to live for far more than 20 years, ie highest chance of indefinite, say 60 years, such that they never reach 0 balance.
I use a pretty sophisticated piece of retirement planning software using Monte Carlo simulations to answer these questions.
I ran the numbers for a 45 year old male in average health (so the income has to last for life of individual only- no dependent spouse).
The numbers are expressed as a % of retirement savings at retirement date: so 4% means for someone with R1,000,000 in savings, they can draw down an income of R40,000 in the 1st year and increase this by inflation each year in future. To get annual income multiply % by total savings.
I first calculate how much income can be derived if savings are used to buy a guaranteed inflation protected annuity - this is theoretical, I don't know if any insurers in SA sells these to people as young as 45. It is just to get a feel for what the theoretical maximum income is that would last till death.
Guaranteed inflation protected annuity for 45yo male : 4.62%
What follows are results if savings are invested and income drawn down over lifetime - in this case there can be no 100% guarantee as with the guaranteed annuity above. The retiree keeps control over his funds, but bears the full investment/longevity risk. So the outcome has to be expressed in terms of probability of success (success = savings outlasts retiree/ failure = runs out of money whilst still alive):
Below follows the success probabilities for different levels of risky investment portfolios @ 3%,3.5%,4% and 4.5% initial drawdown levels:
Conservative portfolio: 92%, 71%, 51%, 38%
Balanced portfolio: 98%, 94%, 88%, 79%
Aggressive portfolio: 93%, 89%, 84%, 78%
So the sweet spot would be a Balanced portfolio (taking more risk increases the number of failures) drawing down between 3-3.5% in 1st year.
See attached graph - it shows the % in the previous post in graph form. The Vertical axis is probability of success, horizontal is inflation sustainable annual income/ R1,000,000 invested.
The top line at an income level has the best success probability for that income level. You can see the blue line(stable portfolio) is on top at about R25000 (2.5%) and it is 99% safe at that level, but it quickly drops off as income increases and falls to a 50% success rate @ R40000 income. The green line takes over between 25000-45000 (2.5% to 4.5%) as success rate for the balanced portfolio drops from 99% to 79%. The red line (aggressive portfolio) is best if you want to have a risky retirement where you withdraw more than R45000 pa, you face a 1 in 4 failure rate - which is not a great prospect.
Interesting, 3% to 3.5% drawdown makes sense. This I assume is the gross drawdown amount, ie pre fees of the RA itself, as well as then being pre-tax.
I'm assuming to do the R360k total per annum expenses as per the previous example, there is a sweet spot from the tax structuring, between structuring a portion to reflect income with an annuity to take advantage of the R13k tax rebate, so ~R74k of income per spouse. Then a combination of the tax-free interest, TFSA to get you up to the highest pre-tax income that lets you pay 0 effective taxes to this point.
Then once you've reached that threshold, my structure would need to switch to earning income from shares/UTs and paying a combo of divi tax/ CGT at ~3.5% withdrawal rate. I think this would be more cost effective than an annuity/virtual income earned by having investments in a business that pays a salary to "manage" the investments on which I'd be paying income tax at 18%+? Is there any other ways of lower tax once the tax rebate, free interest and TFSA are maxed out than CGT/divi tax?
Interesting, 3% to 3.5% drawdown makes sense. This I assume is the gross drawdown amount, ie pre fees of the RA itself, as well as then being pre-tax.
It is net of costs, and gross of tax.
The risk/return assumptions used in the analysis for a 45 yo above are as follows:
Stable portfolio: expected annual return above inflation - 1% Standard deviation - 1%
Balanced portfolio: expected annual return above inflation - 3.5% Standard deviation - 10%
Aggressive portfolio: expected annual return above inflation - 5.2% Standard deviation - 20%
I'm assuming to do the R360k total per annum expenses as per the previous example, there is a sweet spot from the tax structuring, between structuring a portion to reflect income with an annuity to take advantage of the R13k tax rebate, so ~R74k of income per spouse. Then a combination of the tax-free interest, TFSA to get you up to the highest pre-tax income that lets you pay 0 effective taxes to this point.
Then once you've reached that threshold, my structure would need to switch to earning income from shares/UTs and paying a combo of divi tax/ CGT at ~3.5% withdrawal rate. I think this would be more cost effective than an annuity/virtual income earned by having investments in a business that pays a salary to "manage" the investments on which I'd be paying income tax at 18%+? Is there any other ways of lower tax once the tax rebate, free interest and TFSA are maxed out than CGT/divi tax?
The optimal investment structure for tax purposes (without detracting from the expected performance) will differ depending on the individual/couple's circumstances. The main idea is to work with a plan over many years to get the optimal amounts of asset per class located in tax advantaged accounts, without sacrificing flexibility. First fully use the exemptions and rebates, then place assets that earn taxable income (interest/ property dividends) in tax advantaged accounts, then if there still is space, place shares in those accounts to avoid dividend tax and CGT.
Also follow a disciplined approach to use the exemptions and rebates every year - if you don't use it you lose it.
Also manage the taxable amount drawn down from a living annuity from year to year - lower the amount in years when large cap gains need to be realised, and rather draw down more from the taxable accounts (unit trusts/ share portfolio etc) in those years.
It is net of costs, and gross of tax.
The risk/return assumptions used in the analysis for a 45 yo above are as follows:
Stable portfolio: expected annual return above inflation - 1% Standard deviation - 1%
Balanced portfolio: expected annual return above inflation - 3.5% Standard deviation - 10%
Aggressive portfolio: expected annual return above inflation - 5.2% Standard deviation - 20%
I'm assuming to do the R360k total per annum expenses as per the previous example, there is a sweet spot from the tax structuring, between structuring a portion to reflect income with an annuity to take advantage of the R13k tax rebate, so ~R74k of income per spouse. Then a combination of the tax-free interest, TFSA to get you up to the highest pre-tax income that lets you pay 0 effective taxes to this point.
Then once you've reached that threshold, my structure would need to switch to earning income from shares/UTs and paying a combo of divi tax/ CGT at ~3.5% withdrawal rate. I think this would be more cost effective than an annuity/virtual income earned by having investments in a business that pays a salary to "manage" the investments on which I'd be paying income tax at 18%+? Is there any other ways of lower tax once the tax rebate, free interest and TFSA are maxed out than CGT/divi tax?
The optimal investment structure for tax purposes (without detracting from the expected performance) will differ depending on the individual/couple's circumstances. The main idea is to work with a plan over many years to get the optimal amounts of asset per class located in tax advantaged accounts, without sacrificing flexibility. First fully use the exemptions and rebates, then place assets that earn taxable income (interest/ property dividends) in tax advantaged accounts, then if there still is space, place shares in those accounts to avoid dividend tax and CGT.
Also follow a disciplined approach to use the exemptions and rebates every year - if you don't use it you lose it.
Also manage the taxable amount drawn down from a living annuity from year to year - lower the amount in years when large cap gains need to be realised, and rather draw down more from the taxable accounts (unit trusts/ share portfolio etc) in those years.
- Sygnia Skeleton Balanced 70 fund – Unit Trust fund
- Sygnia Skeleton 70 fund – unitised life fund
What's the main difference between these too, and which one would be better for a small, non-primary, more risky RA?
- Sygnia Skeleton 70 fund – unitised life fund
What's the main difference between these too, and which one would be better for a small, non-primary, more risky RA?
- Sygnia Skeleton Balanced 70 fund – Unit Trust fund
- Sygnia Skeleton 70 fund – unitised life fund
What's the main difference between these too, and which one would be better for a small, non-primary, more risky RA?
(I have read the differences in their FAQ - but - not sure which to go for)
- Sygnia Skeleton 70 fund – unitised life fund
What's the main difference between these too, and which one would be better for a small, non-primary, more risky RA?
(I have read the differences in their FAQ - but - not sure which to go for)
The_Ogre
Honorary Master
OK, seems this process is much faster than I thought. Sygnia sent me a mail to confirm which fund I want to move my investment to:
- Sygnia Skeleton Balanced 70 fund – Unit Trust
- Sygnia Skeleton 70 fund – unitised life fund
I have absolutely no idea what the difference between these two is, can you guys assist please?
The_Ogre
Honorary Master
Roffels
, only see your post now. Did you also do a transfer to them?Roffels
Nah - setting up a debit order.
Although I missed the detailed post above, I just decided to try something a little more aggressive to my primary RA which is mostly Balanced funds.
They are almost identical.
Go with the unitised life fund - it is bigger so more economies of scale and lower internal costs. In a few years I expect the unit trust to be big enough to benefit from these same economies of scale, then you can switch to it if you want to.
The process is not quick - will take about 2 months. They need your application form to initiate the process, that's why you have to make a selection now.
The_Ogre
Honorary Master
Thanks. I'm in no rush. I sent the application form on Friday, on Monday they confirmed receipt and today they asked me to choose.
akescpt
Honorary Master
What bs. Would love to see that breakdown. Is it a section 14 transfer?
I am awaiting my quote from liberty as well to transfer almost 600k. Want to see the quote 1st before deciding. Might just be worth it as my overall growth has been under 7% pa and the past 3 years has been under 4%. This year so far has been 0.1%. Wish I had kept an eye om my policy a lot earlier :/
Yes its for a Section 14 transfer. 2 years ago the amount of the investment was R127K when I made it paid up as I was unemployed for a few months and couldn't afford the monthly premium and now its sitting at R115K.
akescpt
Honorary Master
So are they just raising fees against it? Do you know why it dropped by so much? You should have that breakdown as well. That's some shocking performance or massive penalties.
supersunbird
Honorary Master
Probably some kind of penalty. If you paid a previous penalty for making it paid up or similar thats against the spirit of their agreement with Treasury from the 2000s.
akescpt
Honorary Master
Depends on how old it is.
supersunbird
Honorary Master
Even then, paying penalties twice are not on. I’m sure the ombud found against it. Will check when on PC later.