Retirement and self-sabotage in South Africa

[Pegasus]

Here is my calculator results, if you maintained that investment over 5 years, you would be flat even. Notice the difference in returns over the last 5 years.

RA

View attachment 1013726

Discretionary

View attachment 1013728

If you push that out to 10 years...

RA

View attachment 1013730

Discretionary

View attachment 1013734

Beyond this, contributions from you into an RA are far smaller than amounts that you get from the return rate.

You're focussed on the underlying investment, and I'm talking about the tax break you get from investing intpo the RA.

 

[Scooby_Doo]

You're focussed on the underlying investment, and I'm talking about the tax break you get from investing intpo the RA.

I don't know how you can divorce the two concepts when making a decision.

 

[Pegasus]

I don't know how you can divorce the two concepts when making a decision.

Some more lazy maths.
I know you did a once of R100 000, but anyway...

If I invest R100 000 per year into an RA for 5 years.
I get R27 000 back each year, so R135000 .
Plus 27% from the extra R27 000, for 4 years, so another R29160.

So R165 000 return already even if the underlying investment is zero.

So that is the benefit of an RA.


Of course one day when you cash in you pay some back.

 

[Scooby_Doo]

Some more lazy maths.
I know you did a once of R100 000, but anyway...

If I invest R100 000 per year into an RA for 5 years.
I get R27 000 back each year, so R135000 .
Plus 27% from the extra R27 000, for 4 years, so another R29160.

So R165 000 return already even if the underlying investment is zero.

So that is the benefit of an RA.


Of course one day when you cash in you pay some back.

You are correct, but we have to put this in context. The whole industry is saying the an RA is the best thing you can do and you can't do better, which is just not true all the time especially if you have multiple decades ahead of you.

 

[Pegasus]

You are correct, but we have to put this in context. The whole industry is saying the an RA is the best thing you can do and you can't do better, which is just not true all the time especially if you have multiple decades ahead of you.

I would actually agree that an RA or Pension is the best thing you can do with 15% of your salary over a few decades.
All things being equal.

 

[Scooby_Doo]

I would actually agree that an RA or Pension is the best thing you can do with 15% of your salary over a few decades.
All things being equal.

All things being equal.

Except they are not, SA returns are too far behind international benchmarks.

 

[Pegasus]

All things being equal.

Except they are not, SA returns are too far behind international benchmarks.

I am negative on our future myself, but it's not the first bear market I've been through.

One five year period is not the next 5 year period.
For instance, if you had S&P from 2000 to 2005 you'd make a loss.
I recall that period...

There were many years when the JSE outperformed the USA.

Nice tool to play with.

S&P 500 Returns since 2005

www.officialdata.org

 

[supersunbird]

Here is my calculator results, if you maintained that investment over 5 years, you would be flat even. Notice the difference in returns over the last 5 years.

RA

View attachment 1013726

Discretionary

View attachment 1013728

If you push that out to 10 years...

RA

View attachment 1013730

Discretionary

View attachment 1013734

Beyond this, contributions from you into an RA are far smaller than amounts that you get from the return rate.


Edit,

Not sure how to calculate it, but a good question to ask ourselves is based on how much time you have left until retirement, how much higher would your discretionary investments return rate need to be to outperform a similar investment into an RA?

The flaw in your calculations is missing the income tax rate and the retirement fund tax benefit, say you were in the 31% tax bracket, your real return (due to paying less tax) would be 34.36%. That money not paid in tax (31% of whatever you contributed), you could spend or invest however you like.

 

[Scooby_Doo]

The flaw in your calculations is missing the income tax rate and the retirement fund tax benefit, say you were in the 31% tax bracket, your real return (due to paying less tax) would be 34.36%. That money not paid in tax (31% of whatever you contributed), you could spend or invest however you like.

View attachment 1013782

I did include the tax benefit, I used the maximum 45% in my calculations.

 

[supersunbird]

I did include the tax benefit, I used the maximum 45% in my calculations.

Oh yes, I see now

Now do the same where 100 000 is in SA retirement fund and 45 000 is in discretionary with same growth.

 

[Scooby_Doo]

Oh yes, I see now

Now do the same where 100 000 is in SA retirement fund and 45 000 is in discretionary with same growth.

Same maths, RA + Discretionary after 5 years is about R100k more than just the discretionary investment. However from year 6 onwards you are better off with the discretionary.

 

[John_Phoenix]

But that's only 27% on newly added funds.

1) It doesn't give you 27% growth on your previous contributions.
2) Returns in the local market are poor compared to offshore.
3) Geopolitical risk - the end result is your entire sum of contributions could be worth R0.00 when you retire.

Add inflation into the mix, and you only have one olive, no vermouth and a shot of gin in your martini at maturation.

All the meanwhile, your "broker" / financial advisor has been helping his company make 5%+ pa... This year, next year, and for the next 20 years.

That premium / contribution you make every month is pure "cream"

27%, before tax, before inflation, and fees? That gets eroded real quick.

Moral of the story, diversity is king.

 

[HavocXphere]

Major issue is more making a 30+ year bet as Jay says.

All the tax benefits aren’t worth anything if you can’t get the money out again

 

[Speedster]

Some more lazy maths.
I know you did a once of R100 000, but anyway...

If I invest R100 000 per year into an RA for 5 years.
I get R27 000 back each year, so R135000 .
Plus 27% from the extra R27 000, for 4 years, so another R29160.

So R165 000 return already even if the underlying investment is zero.

So that is the benefit of an RA.


Of course one day when you cash in you pay some back.

Why 27%? Should be somewhere between 36% and 45%.

 

[Pegasus]

Why 27%? Should be somewhere between 36% and 45%.

It could also be 0% depending on your tax situation. 27% was the original number used as an example.

 

[Speedster]

It could also be 0% depending on your tax situation. 27% was the original number used as an example.

Yeah yeah. I guess if you're earning R5k a month and saving for an RA / offshore you're doing pretty well.

 

[supersunbird]

Why 27%? Should be somewhere between 36% and 45%.

The 27% came from my below post which comes from the tax hit on ones R329 000 in the 3rd bracket when withdrawing. Obviously less than that amount only got taxed at 18%, and more than that 36%.

As it should be. Mandatory preservation has it's own issues, savings in a retirement fund won't buy you food if you are retrenched or fired (if saving in an RA one should be aware that one cannot access the money in same situation). If you want to emigrate, you can quit your job and take your money (now RAs and one-withdrawal-done Preservation Funds have a 3 year waiting period when done emigrating).

If people want to pay the below taxes cause they think they can do better than say 27% a year (*coughs in MTI and that "professor" conman who was recently sentenced*) then so be it.

View attachment 1013568

 

[Speedster]

The 27% came from my below post which comes from the tax hit on ones R329 000 in the 3rd bracket when withdrawing. Obviously less than that amount only got taxed at 18%, and more than that 36%.

That's on withdrawal though. It shouldn't factor on the compounding side.

 

[supersunbird]

That's on withdrawal though. It shouldn't factor on the compounding side.

I know, the article was about withdrawals, and thus my early post was about withdrawals and that's where 27% was dug up by others.

 

[Pegasus]

That's on withdrawal though. It shouldn't factor on the compounding side.

Point # 1 here:

10X Investments

More money when it matters most

www.10x.co.za

Contributions are tax deductible​

In short, you pay less tax.

Money that you put into a retirement annuity is deducted from your taxable income. So, for example, if you earn R500,000 a year, and contribute R50,000 to an RA during the year, you’re only taxed on R450,000. (This is to illustrate the principle only – in reality, your tax calculation will probably include other tax deductions.)
There are limits. A maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000, is tax deductible in a tax year. You can contribute more to your RA but after you’ve reached these limits, your contributions are rolled forward to and automatically deducted in future years. Also, the limit applies to all your retirement savings combined (including retirement annuities, pension funds and provident funds). So if you contributed the maximum of R350,000 in total, and R150,000 went to a pension fund at work, only R200,000 of RA contributions would be deductible.