I am currently employed with a good salary, but no pension or retirement benefits. I can save R4000 a month, but I don't know how to go about putting this money somewhere where it will grow and ensure that I have a nest egg upon retirement. Banking it will not give me the best return.
I've been told to go for unit trusts, but I need advice on whether this is the best place to safely put my money. I would be most grateful for any advice you can give me on what to do with R4000 a month to ensure I end up with enough money to live off in 10 to 20 years.
I am a 42-year-old single career woman with no dependants.
If a person saves R4000 per month (increasing it by 10 percent per year) in an investment that returns nine percent per year for 20 years; at the end of 20 years they will have about R5.876-million saved. Doesn?t that sound like a lot of money?
However, if we discount that at an average inflation rate of six percent per year over 20 years, then the actual value compared to today?s prices is closer to R1.832-million. If you take that amount and expect to live off the interest as a pension, and you also expect a nine percent per year return going forward, then your 'pension' will be R13 741 per month before tax.
Obviously, R4000 per month saved over 10 years will be less than half of that.
This is a very, very basic calculation, merely giving you an idea of how much money you could accumulate in the next 20 years. Only you will know if this will be enough or not!
So, where to invest it?
Well, if this is the only investment and there is no pension deduction then a retirement annuity may be a good option. This type of investment allows for a tax rebate which can be re-invested thus increasing the funds at retirement substantially. A financial planner would be able to help you with the calculations to determine how much of a contribution to a retirement annuity would be tax deductible.
As an illustration, let?s imagine that the entire R4000 per month is tax deductible and your tax rate is 30 percent. That would result in a monthly rebate due of R1200. So, even though you only save R4000 per month, SARS effectively gives you a further R1200 per month to add to it.
On top of that, all investment returns within the RA fund are also tax free. It?s obvious that no tax deduction means more money saved.
So then, why are some people opposed to the idea of retirement annuities? Well, because SARS encourages you to save for retirement by giving such good tax concessions, it expects you to do exactly that ? keep it until you retire. So the funds cannot be accessed until you retire, no matter what your emergency may be. Only if you die, become disabled or emigrate are the funds available before you retire. Some people don?t like this lack of liquidity.