High road, low road scenario for retirement


A Fin24 user working overseas has various choices to make now before she retires back in SA in a few years' time. She writes:

We live overseas and have five years left before we retire back in SA. We have a house in SA that we let for R10 500 per month and a bond of R450 000 - other than that only one small retirement annuity.

So we wonder: do we pay off the bond as quickly as we can, sell the house for approximately R1 400 000 and invest the money?

We would then need to rent a flat or some other property when we return to SA.

We have R200 000 in a current account in SA and from this year we are able to save R20 000 per month, obviously depending on the exchange rate.

We have no other debt.

Any suggestions, please - very late planning for retirement.

Sharman Williams, advisory partner, regional head Durban, of The Wealth Corporation, responds:

To give proper advice we would require more information than is supplied.

The following points are fairly generic and cover the sort of issues that would need to be considered.
We definitely do advocate that you consult with a professional financial adviser, though, to ensure that all areas of your particular situation are taken into account.
Firstly, any saving is important, so the sooner you start the R20 000 per month the better, and if you can’t do R20 000 per month, anything is better than nothing.

I am not sure what your tax situation is and where you are working, but utilise any tax relief you can, for instance retirement annuity contributions, to maximise the long term returns.

With regards the R200 000 in the money market account, a portion would need to be set aside for emergencies, but we would suggest that one could receive better returns over that time frame in other asset classes rather than cash.

I don't know your ages, but although you have mentioned retirement in five years' time, a consideration is to work for longer - that is, the longer you can defer withdrawing from the funds the better.
With regards the actual house, often with property it can be a fairly emotive decision too, but we have summarised a couple of scenarios below to assist in coming to decisions.

Option 1

The high road outcome is that the house is paid off in five years’ time and then becomes the primary residence.

This assumes current rental and bond rate levels, full occupancy and minimal operating costs.  
The low road is that your tenant defaults, interest rates rise and major maintenance is required – the real issue being that property letting is not a passive investment. It is a business venture.
Assuming the high road scenario plays out, a realistic investment assumption for a balanced portfolio is a return of 5% above inflation, which we assume to be 6% - therefore a gross return of 11%.

All our figures are in present values terms (that is current buying power, assuming an average inflation rate of 6% per annum).
Assuming an initial capital sum of R200 000 and the proposed contribution of R20 000 per month, it is likely that the asset value built up would be in the order of R1.5m, in present value terms.

An initial monthly income of 5% of the capital value escalating with inflation would allow a withdrawal of approximately R7 000 per month in today’s money.
Option 2

Assume that the house is sold now and the proceeds also invested in a balanced portfolio. The proceeds would be in the order of R950 000 after settling the bond - to this the cash of R200 000 plus the regular savings would be added.

This would result in accumulated capital in the order of R2.7m, in present value terms, and the proposed initial withdrawal escalated at inflation would result in an income in today’s money, of approximately R12 500 per month.

Your living expenses would be higher to the extent of your rental as you no longer own the property.
In the high road scenario the first option is better, as the rental saving exceeds the income foregone.
The second option has the advantage of greater certainty, but the outcome is less attractive.  
The age and the living expenses of the individuals are also very relevant. The role of the adviser is to stress test your assumptions so that you can make informed decisions after considering all relevant factors.

Jacques du Toit, property analyst at Absa home loans, provided the following graph:

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

We live in a world where facts and fiction get blurred
In times of uncertainty you need journalism you can trust. For only R75 per month, you have access to a world of in-depth analyses, investigative journalism, top opinions and a range of features. Journalism strengthens democracy. Invest in the future today.
Subscribe to News24
Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Yes, and I've gotten it.
21% - 749 votes
No, I did not.
52% - 1870 votes
My landlord refused
28% - 999 votes