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Scarier than dying – not enough money at retirement

in Retirement, Retirement funding, Saving Leave a comment
austen rose
There is always time to catch up… Until there isn’t

For most people, there will come a time in our careers where what we are going to do for money at retirement becomes a really scary prospect. The inconvenient reality is that the sooner this happens, the better our retirement is going to look. The longer you leave it, the more you’re going to have to put away to make it happen.

I can remember back in the day when being broke and a student wasn’t a problem. You could backpack through Europe on a tight budget, sleeping on trains while moving from one country or city to the next, with an ‘eat as much as you like’ train pass. An endless diet of bread cheese and plonk was awesome. Try that when you’re 60… Not fun anymore, right? Forced ‘downsizing’ is downright stressful.

I’m not going to sit here and tell you what you already know and send you on a guilt trip. What’s the point in wishing we were all 20 again and could reset our money mind set. We can’t. But it is never too late. Life doesn’t have a rewind button, as much as we might wish it did. The biggest problem is that it is so difficult for our minds to project so far into the future – especially in an era of rapid change.

So… Instead of looking at it as a ‘pension’ think of it as a ‘passive income’. Either way the money rocks up into your bank account without you having to go out and work for it (and could kick in way before retirement). It is like having a second job without having to work at it (too much, anyway). Yes, it could be by way of a pension (or annuity from a Retirement annuity, pension or provident fund) but it could also be dividends from a stock portfolio, rental from a property portfolio, royalties from books or patents or drawing down on an investment. Make shorter goals.
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Retirement funds – Tax free? You wish!

in Financial Advisory, Regulatory environment, Retirement funding, Tax Exempt Savings Accounts Leave a comment
Understanding when and how you pay tax on retirement funds

Most of us are aware that with certain retirement contributions (pension, RAs) we can get a tax rebate on the premiums, up to an annual maximum. If you’re in a high tax bracket, this could be thousands of rand. Not just that, the investment is not taxed within the fund either. No CGT, no tax on interest, no tax on rental income, and the dividend tax is rebated back. If you have two identical investments, same funds, same platforms, the retirement fund is going to outperform the flexible investment. If you plough back your rebates,even into a TESA or Flexible investment, then it will grow by orders of magnitude more. So… Is this the best and only way to go?

You always pay tax. It’s just a matter of when. With retirement investments you are just deferring that tax. Either you invest after tax (and then still get taxed within the investment – with the exception of TESAs which I will talk about later) or you Invest before tax, and get taxed when you retire.

For most people, your tax bracket increases over time. Getting to the 40% bracket is easier and easier. It’s a nasty little trick called ‘bracket creep’ – the government doesn’t increase the tax bracket, it just lets inflation push you steadily into a higher bracket by moving the limits at below inflation rate every year. (The top bracket has been at 40% since 2002, but that might change next week). In other words, if you’re young your rebates at 18% marginal tax rate are going to be less than when you hit 40%. If you’ve been planning properly, from a young age, you should be able to retire on close to 100% of your last salary, leaving you at that final tax bracket. You do gradually get better rebates from tax, but these are pitiful.

When you retire from an RA, Pension or Pension fund, you can take 1/3 as a lumpsum and the rest as a compulsory annuity. Compulsory annuity = INCOME = Taxable! The lumpsum however is CAPITAL, and the first R500k is tax-free (PLUS any of the contributions you made (as opposed to being made by your employer) into a Provident fund, because those would have been after tax. SARs also add back any excess premiums that haven’t be used as a tax deduction). You have two choices for the compulsory annuity – a ‘living’ or ‘life’ annuity. The life annuity is linked to the interest rate at the time you take it out, and can be made to increase at inflation (with a lower initial payment of course) but usually disappears when you die. Frankly, I am not a fan. Living annuities give you much more flexibility, and if you keep the percentage you take out below 6%, you can still get it to last 20-30 years. If you die before it runs out, the balance goes to your beneficiaries. If you want to read more about RAs, you can go HERE.

That tax-free lumpsum (R500k) should be invested too, probably in a flexible investment, but don’t lump it in with your compulsory annuity. You’ll be turning a tax-free lumpsum into an income to be taxed at your marginal rate! By the time you retire, there should be no debt to pay off, but if there is, then use the lumpsum for that. That lumpsum can then grow to produce an income or for capital expenditures like buying a new car (once you’re past retirement age you’re unlikely to get credit for a car or house).

So… How does this compare to that flexible investment you made at the same time? That is 100% capital, none of it is treated as income. You will have been paying tax as you go, and as you start selling bits of it, you will pay Capital Gains Tax. Every year we get a tax allowance for CGT, it’s currently R30 000 pa. On most platforms, and certainly on LISP platforms (that I use almost exclusively), you can easily turn a flexible investment into one that pays you monthly, in exactly the same way that a pension does. The big difference is that this is not Income, so it’s not taxed as income, and doesn’t push you into a higher tax bracket.
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Deflation – sounds good …is it?

in Economy Leave a comment

Decoding the complexities of inflation

It may sound odd, but the world needs inflation. Here in South Africa we don’t have that problem, we’re always trying to keep ours under control, but we are largely at the mercy of the price of our imports, especially oil. The well-above-average Eskom increases in previous years didn’t help (what the hell did they do with that money?) Our inflation is currently at 5.2% – thanks to the oil price. You can bet that the government is going to use that as an excuse to bump up the fuel levy, yet again. That’s okay right? We all need better roads and they can always use it to replace the e-tolls. Not so fast – those funds aren’t ‘ring-fenced’ (a financial term where revenues can only be used for a specific purpose) but goes into that great big trough called National Treasury (the National Revenue Fund to be exact). You know, the pot they used to pay for Nkandla from. Sigh. So you thought the fuel levy was the only tax? Nope there’s Petroleum products levy , Pump rounding, An incremental inland transport recovery levy, Customs duty collection, Demand side management levy, The Road Accident Fund charge and Fuel Tax. Talk about a cash cow! Note that all these taxes are a fixed Rand/cents amount per Litre and not linked to the price.

Inflation in the West has been under control for a decade now, with the target being 2%. The major European economies are now below that and the PIGS are all in deflation (negative inflation). Japan spent a decade crawling back from deflation, and that is where the worry comes from. Japan is now slipping dangerously close to deflation again, and China is down at 2% (it’s target is 4%).
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Ms Independent – like it’s a bad thing

in Uncategorized Leave a comment
How to stop coming off second-best

In many ways I consider myself lucky enough to come from a family where the girls were encouraged to have careers and have financial independence. Not just my generation, but generations before me. All my aunts and uncles on my father’s side were well qualified and had good careers. My paternal grandmother was a feminist before the word was invented. It was ‘normal’ for me to have a career all my life. Not every woman is as lucky, and shaking off those ‘family’ values that are so deeply instilled can be extremely difficult. We’re also living in a very different era. When I was at school in the 70’s only one kid in the entire school came from a ‘broken’ home. Today as many as half the kids have divorced parents. It is the new normal.

Even if a woman has a career, I keep coming across women who abdicate the financial responsibility in a relationship to the man. “I am hopeless with finance, I just let him do that,” and when they divorce they wonder why they get a Snot-Klap.

Nobody goes into a marriage thinking about divorce. We all think we’re going to beat the odds – I know. I am one of them. Unlike many other women though, I was intimately involved in the finances. That advantage, and the fact that the divorce wasn’t acrimonious- we sat down like grown-ups, wrote down all the assets and liabilities and split them up over the dining room table, saving tens of thousands in divorce lawyer fees – made sure I got back on my feet quickly. How you marry really does matter, I have blogged about the various marriage contracts HERE, so I won’t repeat myself.
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Not just one ingredient in a recipe – Investments

in Asset classes, Investment Leave a comment
Demystifying investments

Investing can be daunting for the average person, not helped by gurus using insider jargon like asset allocation or asset liability modelling, beta, TER, standard deviation, efficiency frontiers and dozens more. Of course you can learn all of these by watching business news every day and googling the terms – but unless this is your job or passion – it’s like watching paint dry. So, what do you need to know so you aren’t ripped off, and what can you leave to the investment nerds that advise you and structure those products?

Asset classes: Basically (and yes, you can get way more complicated if you want to) there are four. Stocks, Bonds, Cash and property. Stocks are found on the local and international stock exchanges. Bonds are similar to cash, and the return is similar. They are issued by government and corporates (they issue them to raise funds, just like you get a mortgage bond to raise funds for your house – it’s long term debt). Property can take various forms, but it is usually commercial rental property. Cash needs no explanation. off shore investments comes with one other big variable. The asset classes will be the same but you have to factor in exchange rate fluctuation. It adds a whole new layer of risk. If the offshore market drops and the exchange rate improves, you’ll have a double whammy.

Return on Investment: Bucks back! This can take various forms. Interest from cash, yield from bonds, capital growth and rental income from property, capital growth and dividends from stock.

Risk: Each of those asset classes behave differently. When you bake a cake the baking powder behaves differently to the egg, but work together to come up with the final yummy product. Cash and bonds don’t give a great return, usually around inflation rate – but they don’t bounce up and down. If you’ve got a delicate investment stomach – that is the way to go, but it isn’t going to grow much beyond inflation. Property is in the ‘new normal’. It used to give a fairly even return, without the ‘volatility’ you get from the stock market. The 2008 credit crunch and recession was caused by property shenanigans in the States, and since then we have entered the ‘new normal’. Property has shown itself to be just as volatile and unpredictable as the stock market, but also giving some decent returns. In 2014 the returns from property outstripped the stock market. The stock market can be very volatile. It can bounce up and down percentage points on a daily basis.
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Let’s talk money, Babe…

in Uncategorized Leave a comment
arum seed
Having those hard conversations early

According to some statistics, more than 50% of couples go into a marriage (or cohabitation situation) without having an in-depth financial discussion. I’m not talking about who is paying for what on a day to day basis, I am talking about the big stuff.

  • How much debt are you bringing into the relationship? Full disclosure is imperative.
  • How financially compatible are you? (Read HERE for more)
  • How are you both going to saving for retirement? – I recommend it be equally split and if one partner has to take time off, to have or care for  children for example, then the working partner should continue to pay into that retirement fund. On divorce your partner can claim up to 50% of the fund. When either of you moves job, call in your financial advisor to discuss the impact on your retirement fund and the alternatives.
  • What marital regime will suit you best (see my recent blog HERE)?
  • Don’t take shortcuts when listing your existing assets on your Ante Nuptial Contract. Include the current value of your retirement funds.
  • If you’re going to inherit anything in the future, make sure your benefactor has a properly constructed will that removes the inheritance from the marital regime and that your ANC also excludes inheritances incase they don’t. In other words, anything you inherit irrespective of how you marry (ANC, Community of Property etc.), will always be yours. No sharing. If you do inherit after you marry, don’t mingle it with the family assets. This might be hard to do, but speak to your lawyer or financial advisor on how to do it.

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