TFSA vs RA vs Satrix - Calculator

[Neo_X]

Financial independence - Calculator ( Covering TFSA / Equity and RA)

Hi guys

Since Financial independence have been bugging me a while, i decided to put some time into the following calculator.

Calculator Link
(hosted on dropbox, please select download (Three dots top right)



It basically calculates over 4 evenly distributed periods what your after tax return will be for the different type of investments (and combinations there of)
Basic operation :

• income is invested as per inputs
• investment is stopped at the configured FI years
• Required salary at that age is calculated (basically current expenses inflation adjusted plus the spending buffer
• draw-down is tested(eg first equity then TFSA(using the required salary calculated as per above)
• once 55 is reached draw capital is combined with RA, and max salary is drawn to reach 95
• possible surplus salary at 55 is reported (after tax, inflation adjusted), as well as draw strategy that gave the best result

**Note1 If draw down pre 55 failed, salary will be shown as R0.00

Inputs:

Something interesting that the calculator now roughly allows is to determine if pre tax or post tax RA contributions is the best (remember to adjust your after tax savings percentage accordingly)


Capital gain tax is applied to Equity investments with exclusions applied.

If any obvious mistakes is picked up, please let me know. Otherwise - i hope this helps someone

The usual yada yada T&C's applies - cant take responsibility if an excel mistake causes you to eat beans at the age of 60 ).

Have fun

Neo_x

*edit*
Update to version 4.2(4/05/2017)
* Added the latest tax tables (note that tax tables for future years is automatically adjusted based on a 10 year average.)
* increased TFSA to 33,000 (note that there is an option to automatically increase the TFSA)



Update to version 4.1(8/03/2016)
* Added the latest tax tables (note that tax tables for future years is automatically adjusted based on a 10 year average.)
* improved the CGT formulae to allow adapting to future tax changes (latest tax change moved the previous 33% up to 40%)

*pending - still to Add the RA contribution limit ( there is an annual amount after which the tax benefit doesn't apply on a RA)

Update to version 4.0(6/12/2015)
* Added functionality to add retirement annuity deduction as per payslip. (caution - this is kept constant throughout the calculator and adjusted as per your pay increases. Any other contributions towards an RA will be after tax, and tax returns will be re-invested).
Although some checks is in place, please double check that your RA deduction is not greater than the allowed SARS Tax benefit.
/* this is quite a major update - if anything strange is noted on the results, please provide feedback

* Summary screen was updated -with a total Portfolio value, and some readability/formatting.



Update to version 3.8(03/12/2015)
* Improved summary page after some recommendations (added portfolio values at the FI year, so that you can have a visual of the values)

Update to version 3.7(19/11/2015)
* improved a formula to be more accurate for monthly interest(This was workbook wide, thus affects all totals)

Update to version 3.6 (7/7/2015)
* fixed a bug that slipped in when moving some of the reference tables around (affected TFSA contributions)
* adjusted tax table inflation averages a little.


Update to version 3.5
* Added a once off bonus at FI - configurable. This is to allow a lumpsum draw to happen at FI, mostly for big expenses (paying off house/car, etc)
* Fixed tax tables between FI age and 55- changed to CGT tax(was previously normal tax)
* Improved readability on summary screen


Update to version 3.4
*Adjusted internal calculations ,based on paying current loans (eg home /car) - expenses that wont remain into financial independence for long - configurable(change to zero if you plan to keep paying off your home/car up to 95 )
*improved the results screen ,showing more details as to what is happening, including your salary at FI.

only challenges that still remains :
* Drawing a salary after FI is calculated, mostly, based on drawing your tax every month. this wont be the case, as you will draw a once off SARS amount after tax claims are due.

* Homeloan and car expenses is removed after the payment period is complete - not sure how to tackle the scenario where you want to continue wasting money into the latest and fastest clown-mobiles every few years. for now, please configure the buffer to allow for any expenses that you will keep/add after FI.


Update to version 3.3
*discovered and fixed a major miscalculation with regards to savings (was previously matching salary increases, while it should be based on salary minus inflation adjusted expenses.
Bonus part is that this increases savings, and thus will result in a quicker FI.
*added more accurate descriptions on the summary page
*added a check to show a salary shortfall (eg your increases is below inflation, which then results in running into a salary that cant carry your expenses.

Update to version 3.2
*Tax tables was "ahead" with a year - Corrected
*Improved the Salary prediction required at Financial Independence - should now be much more accurate(current expenses is inflation adjusted with buffer added, then reverse tax is applied to determine the before tax salary)
*Added a Spending buffer which will be added to your salary after FI (use full if you want to go on that yearly travel trip



Update to version 3.1
* Expanded draw down function - now select the most rewarding draw path (selecting between Equities/ TFSA and also splitting a third of the RA at 55 into equities or keeping it in tact)
* Added a option to block TFSA limits from increasing every year(configurable under constants)
* fixed some calculations for extreme cases(eg paying RA and TFSA off in one month)

Update to version 3.0
Major functionality update - basically it is now a South African Financial Independence calculator. Most Inputs is customizable, including Age, Inflation, and current portfolio values. System will output 3 periods between your current age and 55 years, allowing you to see capital growth.

Update to version 2.0
* major changes in tax tables - applied 10% increase on tax tables per year (current average since 2005) - this is configurable under inputs...
* added 20 and 30 year results sets as well
* 10 year result is based on tax for a ten year "draw" (year 15 tax is applied)
* 20 year result is based on tax for a twenty year "draw" (year 30 tax is applied)
* 30 year result is based on tax for a thirty year draw (year 45 tax is applied)


Update to version 1.7
* Fixed tax tables related to tax return(now properly selects the correct bracket)
* Applied the before 65 rebate of 13 to all calculations

Updated to version 1.6
* Fixed a mistake on the first third RA tax (Thank you KalMaverick!)

Updated to version 1.5
* Added Ability to limit RA contribution to values other than 15%
* Applied latest SARS tax tables
* Tax on RA 2/3's and Equities was adjusted to be more leniant (assuming 10% draw down)
* Tax bracket changes due to salary increase should also be handled better now
*

Updated to version 1.4
* Fixed RA SARS return when only small portion of Salary is paid

Updated to version 1.3
fixed major mistake on "TFSA then RA" worksheet, plus corrected RA lump sum tax as per latest SARS document

Updated to version 1.2
Fixed for small salaries (eg not capable of reaching RA of 15%)
fixed for big salaries (tax return of greater than 30k was messing up TFSA allocation)

 

[WebNexus]

Did you factor in:
-Annual RA deduction? If so at the new rates?
-CGT? If so is it assumed that a complete disinvestment of "normal" takes place at the end of the 10 years.
-CGT saving of the TFSA?
-The retirement tax implications if you retire at year 10 and following that the assumption of taking the one third.
-What percentage of normal is interest and thus taxed each year.

Otherwise thx for the effort and thx for sharing : )

 

[Neo_X]

Did you factor in:
...snip....
Otherwise thx for the effort and thx for sharing : )

i had to generalize a bit on some of the above, but feedback is welcome :

Annual RA deduction? If so at the new rates?

- Took it as 15% max. Will maybe add a field to allow the user to select how much he wants to push into his RA.

-CGT? If so is it assumed that a complete disinvestment of "normal" takes place at the end of the 10 years.

Correct - complete disinvestment - just for the sake of comparison. if you get more technical, then years 8,9,10 will be taxed at PAYE and 1 to 7 as Capital gains. for now i have taxed all at capital gains, which i have taken to be third of the PAYE rate.

-CGT saving of the TFSA?

my simple solution was not to apply any tax on the TFSA. thus i would assume the TFSA will grow faster than the current fact sheets due to reinvested dividends not being taxed

-The retirement tax implications if you retire at year 10 and following that the assumption of taking the one third.

This was a difficult assumption - as i didn't want to complicate the final amount to much. Took the tax as follows:
one third minus 300,000 was taxed at a fixed 27%
two thirds was taxed at the PAYE rate you enter. (this will actually be a annuity salary taxed monthly and not on the lumpsum) - i can maybe consider taxing this at a ratio related to the RA gain over 35 years?

yes getting tax correct on these is a bugger :/

-What percentage of normal is interest and thus taxed each year.

Not sure if i follow this - Since you only invest from years 1 to 10, and "draw" at the end, i don't see that tax will be paid during the phase. RA returns from SARS is factored in though.

 

[WebNexus]

Perfect. Thanks for the feedback.

-What percentage of normal is interest and thus taxed each year.
Not sure if i follow this - Since you only invest from years 1 to 10, and "draw" at the end, i don't see that tax will be paid during the phase. RA returns from SARS is factored in though.

I see with the assumed growth rates of 15% that it would probably be a equity investment, namely no bonds or cash and thus interest on the those two. So you are right, it doesn't matter. But it does lead to another question. The RA cant get 15% if its reg 28 compliant, so I think you would have to reduce the investment growth rate by a couple percent.

 

[Neo_X]

Perfect. Thanks for the feedback.



I see with the assumed growth rates of 15% that it would probably be a equity investment, namely no bonds or cash and thus interest on the those two. So you are right, it doesn't matter. But it does lead to another question. The RA cant get 15% if its reg 28 compliant, so I think you would have to reduce the investment growth rate by a couple percent.

you are right - Equity investment for now.
Please explain wrt to the R.A? I haven't see specifics up to that level (eg i assumed that you can put 15% of your pre-tax money into an Allan gray balanced). anything above 15% will not be tax deductible

 

[supersunbird]

you are right - Equity investment for now.
Please explain wrt to the R.A? I haven't see specifics up to that level (eg i assumed that you can put 15% of your pre-tax money into an Allan gray balanced). Anything above 15% will not be tax deductible

He means the growth rate/returns wont be 15%, because of Regulation 28 limits (only up to 75% can be equity, only up to 25% can be in listed property, only up to 25% can be in foreign assets, 100% can be in bonds or cash).

He is not 100% correct though, can have 75% equity/25% listed property if you know what you're doing.

 

[Neo_X]

Ah ok

The RA growth rate can be customized on the summary page under inputs.
I have found coronation to give the most extensive calculator, where they claim the returns is after all fee's was deducted :

http://investmentcalculator.coronation.com/InvestmentCalculator.aspx

Balanced plus since 1996 returns 16.7% (although last ten years a little bit better @17.28)

 

[MikyMouse]

So are we saying that it's better to max out the TFSA 1st and then the RA?

 

[supersunbird]

So are we saying that it's better to max out the TFSA 1st and then the RA?

Nah, something is flawed there. Especially with regards to tax and the RA.

 

[WebNexus]

Nah, something is flawed there. Especially with regards to tax and the RA.

Well with a RA R1(before tax income) x 15%(deduction cap) = 0.15c x 41%(assume top tax bracket) = 0.0615c tax saving on a rand saved. And assume the savings is reinvested. Then taxed again when you retire.

With the TFSA its R1 x (1+15%)^10 years = R4.045 that is not taxable.

Now if I know sunbird he will say wtf is the point of the above. To be honest I dont know. lol. Im just trying to make sense of the math and looking at the formula it seems that the actual tax savings from a RA lower then expected compared to the TFSA, especially if you take into account that 1/3rd 2/3rds retirement tax on lump sums.

A potential issue in the math with regards to the TFSA is was there a R30,000 cap on annual contributions in the calculator. If its assumed that the R500,000 was invested upfront in year 1, then there is a error. A gradual contribution of R30,000 each year needs to happen. In addition it would take R500k/R30k=16.67 years to reach the R500,000 and not 10 years.

I think these to factors are contributing to the screwed view in the calculator.

So are we saying that it's better to max out the TFSA 1st and then the RA?

I would say yes, but only if you are young (sup 30) and will not be accessing the investment until retirement or past that point. Why? Because the compounding effect of the capital gains tax savings over the long term is ridiculous. The TFSA is more scared in my few then a persons pension for this reasons.

Its a fine balancing act between flexible investments, TFSA and retirement savings products and each persons circumstances are different so there is no "golden rule" one can follow.

I think before a RA or TFSA or high risk investment is used(shares, property, etc) a person needs a balanced risk/return profile emergency investment fund that can be used to protect the other investments from you accessing it in times of need.

Basically I think the TFSA is not a flexible access investment, but a super long term investment.

That is just my view.

 

[Neo_X]

Well with a RA R1(before tax income) x 15%(deduction cap) = 0.15c x 41%(assume top tax bracket) = 0.0615c tax saving on a rand saved. And assume the savings is reinvested. Then taxed again when you retire.

With the TFSA its R1 x (1+15%)^10 years = R4.045 that is not taxable.

Now if I know sunbird he will say wtf is the point of the above. To be honest I dont know. lol. Im just trying to make sense of the math and looking at the formula it seems that the actual tax savings from a RA lower then expected compared to the TFSA, especially if you take into account that 1/3rd 2/3rds retirement tax on lump sums.

A potential issue in the math with regards to the TFSA is was there a R30,000 cap on annual contributions in the calculator. If its assumed that the R500,000 was invested upfront in year 1, then there is a error. A gradual contribution of R30,000 each year needs to happen. In addition it would take R500k/R30k=16.67 years to reach the R500,000 and not 10 years.

I think these to factors are contributing to the screwed view in the calculator.



I would say yes, but only if you are young (sup 30) and will not be accessing the investment until retirement or past that point. Why? Because the compounding effect of the capital gains tax savings over the long term is ridiculous. The TFSA is more scared in my few then a persons pension for this reasons.

Its a fine balancing act between flexible investments, TFSA and retirement savings products and each persons circumstances are different so there is no "golden rule" one can follow.

I think before a RA or TFSA or high risk investment is used(shares, property, etc) a person needs a balanced risk/return profile emergency investment fund that can be used to protect the other investments from you accessing it in times of need.

Basically I think the TFSA is not a flexible access investment, but a super long term investment.

That is just my view.

Looking at my screenshot above, the biggest difference between TFSA and RA is the tax.
eg investment wise :
TFSA then RA ( with RA tax returns invested into the TFSA) will give 300,000 paid into the TFSA over 10 years and 307k into the RA.
RA then TFSA (with RA tax returns invested back into RA) will give 740,000 paid into the RA over 10 years.

After 10 years TFSA then RA is worth R1.3M and RA then TFSA is worth 1.5m.

The big issue comes in on the RA taxing (see page 7 of this document)


I have applied the above on the calculations, but maybe a mistake is picked up with the first third -seems like the first 300,000 is not taxed.

can someone maybe check my math, keeping the above document in mind :
RA received : 3,000,000
Third of RA as lump sum : 1,000,000
300,000 tax free - taxable portion remains : 700,000

tax on 700,000 = 135,000 + 36% x 700,000 = 135,000 + 252000 = 387,000 tax
first third remain : 700,000 - 387,000 = 313,000 + 300,000 tax free = 613,000

other two thirds for sake of simplification will be taxed at your nominal tax rate.

 

[WebNexus]

Your tax tables are a bit old. Here are the latest ones.

http://www.treasury.gov.za/documents/national%20budget/2015/sars/Budget%20PocketGuide%202015-16.pdf

 

[Neo_X]

Your tax tables are a bit old. Here are the latest ones.

http://www.treasury.gov.za/documents/national%20budget/2015/sars/Budget%20PocketGuide%202015-16.pdf

aha! ouch!
will update accordingly. Thank you

 

[Verde]

other two thirds for sake of simplification will be taxed at your nominal tax rate.

There's your 1st big problem right there. With an RA tax is saved at your marginal rate during the accumulation years, and taxed at the average rate during retirement (assuming it is your only source of taxable income). For most taxpayers (I can confidently say anyone who earns less than 2m pa in their peak earning years) the average rate in retirement would be less than half of their marginal rate during their working years. This is due to the lower income requirements for retired people and the more favourable tax dispensation for the aged.

With a bit of planning, most married people who pay tax at a marginal rate of 41% would end up paying tax at a +-10%-15% rate on the withdrawals from their RA/pension funds.

This and the tax free growth within an RA/pension is the great advantage of these vehicles. The TFSA only gives the tax free growth, so it is the inferior vehicle, and should only be used once the RA is maxed in theory.
Off course one should also pay attention to the restrictions that apply to RA's (particularly the restrictions on withdrawals), and the risk that government can reduce the RA tax benefits in future.

 

[Neo_X]

There's your 1st big problem right there.

understood - but i don't want to push the calculator to go over to retirement planning (tax tables for before during and after will become too complex to maintain)

That was the main reason to cover only a 10 year period - to show difference in money that you will get out. I know its a bit of a grey area( eg applying the third lumpsum tax, but not the annuity)

my feeling is that the annuity part can just as well be applied to the TFSA and equity savings (eg you will not actually pay the current CGT on the equity portion during retirement).

Guess i can add a description that the calculator is rather over taxing than under taxing?

 

[supersunbird]

There's your 1st big problem right there. With an RA tax is saved at your marginal rate during the accumulation years, and taxed at the average rate during retirement (assuming it is your only source of taxable income). For most taxpayers (I can confidently say anyone who earns less than 2m pa in their peak earning years) the average rate in retirement would be less than half of their marginal rate during their working years. This is due to the lower income requirements for retired people and the more favourable tax dispensation for the aged.

With a bit of planning, most married people who pay tax at a marginal rate of 41% would end up paying tax at a +-10%-15% rate on the withdrawals from their RA/pension funds.

This and the tax free growth within an RA/pension is the great advantage of these vehicles. The TFSA only gives the tax free growth, so it is the inferior vehicle, and should only be used once the RA is maxed in theory.
Off course one should also pay attention to the restrictions that apply to RA's (particularly the restrictions on withdrawals), and the risk that government can reduce the RA tax benefits in future.

I concur with this post.

 

[MikyMouse]

Seems like the most sense for me (saving a max of R4K a month) is to first max out the RA (which I won't) and then re-invest the RA tax rebate. Would be interested to know if it's worth topping up my RA to its max with the tax refund or invest that separately in a TFSA

 

[Neo_X]

Updatet version has been linked to OP -latest tax tables included.
RA and equity draw down has been catered for on a basic level, although probably still taxing too much.

Seems like the most sense for me (saving a max of R4K a month) is to first max out the RA (which I won't) and then re-invest the RA tax rebate. Would be interested to know if it's worth topping up my RA to its max with the tax refund or invest that separately in a TFSA

This depends mostly on the gains on your RA vs TFSA(assuming i managed to calculate tax correctly now), TFSA will start winning if gains is about 8% higher..

 

[MikyMouse]

Updatet version has been linked to OP -latest tax tables included.
RA and equity draw down has been catered for on a basic level, although probably still taxing too much.



This depends mostly on the gains on your RA vs TFSA(assuming i managed to calculate tax correctly now), TFSA will start winning if gains is about 8% higher..
View attachment 219972

But that's with a different gain between the TFSA and RA - or am I missing something

 

[Neo_X]

no - completely correct.
I have yet to find RA returns that can keep up with equities. with a TFSA you can invest into ETF's, and some of them do perform much better. if that will be constant for the next ten years - who knows.

in actual fact my Allan gray RA balanced only gave only 10% last year