What to do with spare funds?

[mbeylis]

Hi,

I recently changed jobs and my new company does not offer a Pension Fund whereas my old company did. As a result I now have R4000 extra a month that I need to decide what to do with. As this money was going towards a Pension Fund and thus towards Retirement Money anything I do with this available funds must also work towards my Retirement

I have identified 3 possibilities each with Pro's and Con's and was wondering what others feelings on the matter are

1) Retirement Annuity - I have a RA and can invest the extra R4000 rand here until I retire. The full R4000 would go here and only get taxed when I retire. My concerns here are what sort of ROI I am getting out of the RA and if there are better options

2) Property - I could purchase a property and get tenants to rent it and use this rent money along with R3000 (rough estimate of amount I would get out of R4000 after tax) to pay off the property as soon as possible. Once paid off the rent would become profit. This rent and my extra contributions could then be used to purchase additionals properties. I do realize there is capital gains tax involved here and that you have maintenace costs with a property. My question here would be is would the profit of say selling the property less what I put in of my own money to purchase it be greater than what I would have gotten by just putting the extra money into the RA. Property is a good bet and 50% of my current RA is invested in property anyway

3) Bond Settlement - Investing an extra R3000 into my bond would reduce my payment term by 9 years and save me about R450,000 in interest. Once the property is paid off I could then invest my monthly house installements that I would have been paying for the next 9 years along with the extra R3000 into something else. In essence here although I would not be saving the R3000 each month for next 9 years I would be "saving" in the sense of not having to pay the R450,000 rand in interest and my bond installments would be freed up sooner to invest. So I guess here the question is R450,000 return on investement over 9 years better than say paying off a property in 9 years and selling it for profit better than investing it into an RA for 9 years plus

It must be stressed that this additional funds is money that I want to forget about and must only yield the greatest ROI once I retire which is estimated to be 2034 (22 years from now )

 

[agentrfr]

Pay off the debt first. Don't get ahead of yourself.

AFTER you are in the green, take half of what you save and put it toward a RA and keep it safe there. The other half you can play with (Shares in SABS and a couple Kruger Rands are a good start).

The idea is that you want a nice ROI without leaving too much to chance.

Then speak to an investment specialist... yeah sure they will take a cut of the profits, but generally they have the best ideas on how to grow hoever much you have.

 

[chrisc]

There seem to be many many posts nearly about the same subject - what to do with one's money. Instead of us repeating the story over and over with all sorts of advice, some good (above), some not so good (seen some reckless comments in the past) is there not a way these posts can be summarised or searched for in a more accessible manner? The MyBB search engine seems very broad and frequently you get topics shown to you as the answer to a query which bear no relation to your question.

A GOOD financial adviser is a must in this situation. One that does not work for a specific company like Old Mutual or Liberty Life and will give unbiased advice. Seeing you live in Gauteng I cannot recommend any of my colleagues in Cape Town, but do your homework, get advice from at least 4 different advisors, read the Financial Mail, speak to an accountant.

 

[russellO]

There seem to be many many posts nearly about the same subject - what to do with one's money. Instead of us repeating the story over and over with all sorts of advice, some good (above), some not so good (seen some reckless comments in the past) is there not a way these posts can be summarised or searched for in a more accessible manner? The MyBB search engine seems very broad and frequently you get topics shown to you as the answer to a query which bear no relation to your question.

A GOOD financial adviser is a must in this situation. One that does not work for a specific company like Old Mutual or Liberty Life and will give unbiased advice. Seeing you live in Gauteng I cannot recommend any of my colleagues in Cape Town, but do your homework, get advice from at least 4 different advisors, read the Financial Mail, speak to an accountant.

How do I +1 a post? Oh I forgot it's not Google+.

Speak to some financial advisers and an accountant. For example, putting it into an RA means you won't get taxed on it (or a portion of it depending on your salary and the caps).

 

[hellfire]

Wrong - don't pay off debt first, in this case.
Get a financial advisor, and get the tax benefits of investing in an RA. You won't get those benefits from property or debt settlements.

 

[marco]

Forget RA's

 

[mbeylis]

As I expected I am getting lots of different opinions :->

I do have a financial advisor but past experience with him is he just pushes the company he works for (Liberty)

I think I must find an independant unbiased advisor - do they exist?

 

[Cius]

Hey. While paying off debt soon is not a terrible idea the issue is people seldom have the discipline to back-pay what they owe their retirement savings after paying off the bond. Hence I would advise rather putting the money into a retirement product of some kind and paying off your debt as fast as possible out of what money is left in your budget. It requires far less discipline and math that way. Also some useful rules of thumb:

if you put away 15% of your income from age 25 and retire at 63 you on average should get about 75% of your final pay cheque as monthly income.
If you put away 20% for the same period you should retire on 100% of your last pay cheque.

Companies only put away 15% of "pensionable earnings", which is actually about 12.5% of your gross salary. That will only leave you with perhaps 60% of your final pay cheque as earnings if that is all you rely on. I have checked these numbers with numerous retirees and its generally about accurate depending on how smart you where with what product you where in, risk brackets, and whether you where stupid enough to withdraw pension money each time you changed jobs (fortunately no longer an option).

I currently have my work pension at the 12.5% typical level and an additional RA taking it up to 15% to get the tax benefit. I put another 5% into my bond for now but once that is paid off (it will be really soon) I will put that 5% into ETF's myself for my retirement as my own investment portfolio is beating any RA or unit trust I can find hands down due to how low cost ETF's are and how diversified they are. Hopefully from the time I am about 40 I will be paying the full 20% in each month with 15% being in pension or RA products and 5% being managed by me.

 

[mbeylis]

Well I already have an existing RA so my thoughts are not whether to get one but rather whether to put my additional free capital into it. I will continue to contribute to it, probally have it relooked at though to make sure that it is performing like it should. I transferred the Pay Out I got from Pension Fund into my RA so as to not get taxed on this lump sum, not be tempted to use it and well there wasnt really much else to do with that money

I here what you say about people not back paying their RA once their debt such as bond is paid off but if you are disciplined enough to do this then I cant see how saving R450,000 in interest and reducing Home Loan Term by 9 years is a bad thing. It will basically give me 9 years wortth of Home Loan Payments plus the extra R3K per month to invest into some form of retirement option. Basically what you are saying is that for the next 10 years you will invest R3K into your home loaan and get an ROI of R450,000. But yes this is debt avoided and not money in the bank yet and you need to invest that saved money elsewhere with good returns

Lets say then that we take Bond Repayment out of the equation and we are left with RA or Property. Why is an RA better than Property? The value of property is continually climbing so it will grow in value over the years. Once paid off the rent of the property can be directed into some Retirment Option or an additional Property. Property can sold off at retirement for lump sum. The only way for me that an RA is better is if at retirement the value of the RA is more than the income I have received from renters (once property is paid off) and/or the money received from selling the property

"I currently have my work pension at the 12.5% typical level and an additional RA taking it up to 15% to get the tax benefit." Is there some benefit for having an RA at 15% specifically?

Hey. While paying off debt soon is not a terrible idea the issue is people seldom have the discipline to back-pay what they owe their retirement savings after paying off the bond. Hence I would advise rather putting the money into a retirement product of some kind and paying off your debt as fast as possible out of what money is left in your budget. It requires far less discipline and math that way. Also some useful rules of thumb:

if you put away 15% of your income from age 25 and retire at 63 you on average should get about 75% of your final pay cheque as monthly income.
If you put away 20% for the same period you should retire on 100% of your last pay cheque.

Companies only put away 15% of "pensionable earnings", which is actually about 12.5% of your gross salary. That will only leave you with perhaps 60% of your final pay cheque as earnings if that is all you rely on. I have checked these numbers with numerous retirees and its generally about accurate depending on how smart you where with what product you where in, risk brackets, and whether you where stupid enough to withdraw pension money each time you changed jobs (fortunately no longer an option).

I currently have my work pension at the 12.5% typical level and an additional RA taking it up to 15% to get the tax benefit. I put another 5% into my bond for now but once that is paid off (it will be really soon) I will put that 5% into ETF's myself for my retirement as my own investment portfolio is beating any RA or unit trust I can find hands down due to how low cost ETF's are and how diversified they are. Hopefully from the time I am about 40 I will be paying the full 20% in each month with 15% being in pension or RA products and 5% being managed by me.

 

[Kloofvreter]

Booze and whores.

 

[Cius]

The 15% is for tax purposes although I am hearing they may raise that or have already done so. Still, my dad recently retired and he had a good RA that he paid into for decades. The money he got out was not all that much. He did an exercise where he worked out what he would have gotten if he had ignored the RA and had instead taken the tax knock up front and had invested instead in something like the SATRIX40 and it would have left him far better off. The tax benefit at the end of the day is largely absorbed by the RA's high fees. Hence I am starting to seriously think about Closing down my RA, and leaving it just as my compulsory pension getting me tax breaks and managing the rest myself. My lump sum that I stuck into the markets (SATRIXDIVI) despite bad timing on when I bought it has returned far more than my pension, RA, and the return is far higher than even what I pay on my bond. A good ETF seems to return about inflation + 4-5% where my current interest rate on my bond is at prime -2.5%.

Still, for now I am choosing the safe option of putting extra cash into my bond rather and I plan to pay back what I owe my retirement savings after the bond is paid off. Thing is I know that I am disciplined enough to do that. I know plenty of people that aren't.

As for the property idea, I would never do that as the risks are too high right now. Property is not appreciating much right now and there are a lot of bad tenants and nightmare stories out there. I am a trustee in a complex and we constantly have landlords approaching us to assist them with bad tenants (little we can do). Also SA has yet to pass the political crises that all African countries pass through and you can't take your property onto a plane when you leave. Cash on the other hand can be moved easily enough so for now I am against investing in fixed property beyond your primary residence. Once the ANC has lost its first election peacefully that view may well change but you never know what will happen to a country like ours until the freedom party faces its first credible election threat. Zim was pretty OK until it looked like Mugabe would loose power around 2000. It was then that he kicked the wheels off choosing to destroy the country rather than cede power. I'm not sure the ANC will do any better when they reach that point which will probably be within the next 3 elections or so.

 

[hellfire]

"I currently have my work pension at the 12.5% typical level and an additional RA taking it up to 15% to get the tax benefit." Is there some benefit for having an RA at 15% specifically?

I think that the tax benefit maxes out at 17.5% of gross compensation. So if you put away more than 17.5% into an RA, you don't get the tax benefit and should rather put that excess into a different savings vehicle (like, say, property)