When deciding to invest on your own you must be prepared to do your homework.
Here are some investments which you can consider investing directly into.
Money Market Account For contingencies and emergencies it is important that you have ready access to cash. A money market account offers you access to your money at an interest rate which is normally better that fixed deposits. Banks have certain conditions which you need to explore, such as, minimum balances to keep the account open and how often you make withdrawals. Ideally, you should have this account accessible on your internet banking profile so that you can manage your savings more easily.
RSA Retail Bond
A bond is an investment in debt. Effectively you are lending money to government for a specified period. The case of RSA Retail Bonds the periods are 2, 3 and 5 year options. The interest rates are generally higher than the current money market rates and there are options to link your rate to inflation. This is an ideal investment for those needing interest to supplement their pension as the interest can be paid out monthly to investors who are 65 and older.
Exchange Traded Funds (ETF)
In the universe of investments choosing the right fund manager can be daunting. There are so many styles and objectives which funds are defined by. An easier approach is to invest in a ETF which invests in the average of the market. There are many types such as SATRIX 40 which offers the top 40 shares listed on the stock exchange by their size of company. For as little as R300 per month you can participate in quality stock market shares.
Understand the investments you make as thoroughly as possible beforehand. That way you will enjoy the power of saving over time using the the magic of compounding.
Most of us have an idea that we will retire at 65 and live happily ever after planning golf a few times a week and traveling around the world and back again. Nothing further from the truth when you take a look at the stats of South Africans at 65 and their degree of financial independence.
In the 3 decades that I have been in the industry the statistics have n’t changed.
47% rely on on their families for financial support
31% have to carry on working
16% rely on the state for a pension
This means that only 6% of South Africans are financially independent at age 65. This means that only 6 % of us can maintain our lifestyles after age 65 for the rest of our lives. What makes this statistic more challenging is the fact that we are on average living much longer than our parents. So the 6% probably waters down to half.
The stats are overwhelming. Retirement is an illusion for most of us.
Furthermore, many of us have the dream to retire by the coast and open that coffee shop which will provide us with the purpose and the income we need for the rest of out lives. Be careful! More often than not the business is a lot tougher than you imagine. Coffee shops needs a lot of coffee to cover the rent and expenses leaving very little behind for an income to maintain your monthly needs.
In many cases it would be a better proposition to keep the pension and use the bank’s money to float the business (if you can secure the finance). If you cannot get a loan than that would speak volumes to the feasibility of the business because if the banks are not interested then the chances of making it are diminished.
Pension funds are inalienable which means that your creditors cannot touch it if the worst happened and you went insolvent. So the sweet spot is found when you lend from the bank and keep your pension fund. At least you have something to fall back on.
Whether it’s just retiring or working at the coast it boils down to how much you need to maintain your monthly lifestyle and how long you will need to provide for. The ravages of inflation will place extra pressure on you as well.
The reality is that most of us will have to keep on working. Not a bad thing as it creates a purpose for us to get out of bed every morning. Just be aware of holding onto your pension for as long as you possibly can. You don’t get a scone chance to build it up again.
A great place to save in the short term is your home access bond. With home loans around 10% by saving extra in your bond you effectively get this rate as a return on your money.
Why? Well because the bank calculates the interest owed from the average balance in your bond during the month. It then takes the interest from your monthly installment and allocates what is left behind to paying off your loan. The higher your balance the less interest you pay and the more is allocated.
When assessing an investment you need to consider the following:
Risk – the possibility of losing capital
Return – the yield of the investment over time. This could be interest from cash deposits or bonds, rental income from property or dividends from shares.
Liquidity – how freely are the funds available?
Costs – the charges applied to the investment. Mainly the fund manager, the administrator and the advisor.
Tax – taxes are applied to the various returns as well as capital gains tax when you sell the investment.
When taking all these aspects into account it becomes obvious that the access bond is by far the most effective vehicle in the short term. Especially while interest rates are on the up. In this cycle shares and property and bonds tend to fall while interest bearing accounts tend to rise.
Where can you currently get 10% tax free without risk or costs and your money is immediately available to you.
Some may argue that the other assets are more effective over the long term. However, for the foreseeable future it is difficult find an investment which can yield a net 10% return.
Your access bond is a worthwhile place to save your hard earned money.
When you retire one day you have two basic options when choosing a pension. You either hand over your retirement fund to a product provider and let them provide a pension for you for the rest of your life or you can choose to manage your own fund through your retirement. Lets explain the two options:
The Life Annuity This is a structured pension based on the amount of money you have accumulated and your life expectancy. The product provider will offer you a pension for the rest of your life. Should you die sooner than estimated then the balance of your pension capital goes to the pool. You can take out a guarantee on your pension for a period. The longer the period the lessor the pension. If, for example, you choose 10 years, then the pension will be lower, but should you die, say in year 8, then the remaining 2 years of pension will be paid to you nominated beneficiary.
The Living Annuity
This pension allows you to invest into a wide choice of funds. You decide on your pension by making a choice between 2,5% and 17,5% of the value of your fund. When you die the investment passes onto your beneficiaries. The big risk is drawing down a pension at a higher rate than the investment performance. If you achieve, say, a 10% return and draw down a 12% pension, then you effectively are eating into your capital which will result in your pension drying up a lot sooner. You need to monitor your living annuity carefully, constantly assessing the returns and the percentage drawn down.
So which one should I choose?
If you are convinced that you will live longer than the average, a life annuity is probably the better consideration. The guarantees on the pension need to be studied and understood before committing. Ultimately, the life annuity provides certainty for your retirement around which you can plan more effectively. However, you essentially give the assurance company your money and compete with the statistics of life expectancy.
If you want control of your pension and are prepared to keep involved with the investment during your retirement years, then the living annuity is your better option. The pension drawn should be carefully considered along with the funds chosen. Be realistic about your expectations of returns taking costs into account as it is the net value that matters.
Depending on your total provisions available at retirement you could consider a combination of these options. Your choice of pension is a very important financial decision to make and you should seek advice from a professional financial planner to help you find the appropriate solution.