A young Fin24 reader looking to retire at 50, wants to know the different retirement investment options that will allow her to access all her funds when she retires.
I am a 27-year-old looking for some sound retirement options. I would not like to put my money in a retirement annuity as I would like access to all my funds when I retire. I am looking to retire when I turn 50. What are my options?
Brett Mackay, Investment Consultant and Group RA Manager at 10X Investments, responds:
If you are looking to access the funds only in 23 years' time you have enough time to get some great capital growth from the equity markets. The markets can be volatile in the short term but investing in shares over the longer term will give you the growth you need. You have time on your side so you can afford to be a bit aggressive in your approach.
There is no reason you shouldn't split your savings between retirement products and other investment products so that you can access funds when you want or need them, at age 50, as well as taking advantage of the government's incentives for retirement saving.
Retirement saving is, to a certain degree, a personal journey, but the underlying principles are common to us all. You should consider investing at least some of your savings into a policy that will earn you a tax refund every year for the next 23 years.
You can retire from an Retirement Annuity (RA) at the age of 55, at which time you can withdraw up to a third of your fund to spend or invest as you wish. The rest must be invested in a Living Annuity, where it will continue to grow and provide you with an income.
By putting some of your savings into an RA you will get a tax refund year after year in return for leaving some of your savings in the fund beyond your target date of age 50. It really is worth doing the sums, and taking advantage of the tax incentives. Simply put, the government gives taxpayers some of their taxes back as long as they are saving into an official retirement savings product.
The issue with accessing all of your savings at retirement is that most people do not have the knowledge or discipline to use or invest the funds wisely. A Living Annuity is a way to invest some of your savings in a product that will give you a monthly income for the rest of your life.
Other investment vehicles you can invest in and access before the minimum retirement age of 55, include:
Tax-Free Savings Account: You can contribute up to R36 000 every year into a Tax-Free Savings Account (lifetime limit of R500 000), where it will grow without incurring tax on the growth of the investment (capital gains), the interest or dividends. What is also great about a Tax-Free Savings Account is that you are able to invest into low-cost equity ETF funds that will perform better over time than just parking the funds in a money market fund.
Unit Trust: A great way to invest for any time period. The underlying portfolio determines what the return will be. The longer the term (the time until you need the funds) the more aggressive (higher equity exposure) you should be. You can purchase a variety of different funds within a unit trust, depending on where you think the returns will be. It is recommended to diversify widely to limit the risk. Invest in South Africa as well as other countries in the form of offshore ETFs or funds to help with diversification.
Whichever vehicles you choose make sure your money is working hardest for you by keeping your taxes and costs down. Some products are much more tax-efficient than others, and fees differ vastly across products and service providers. Also make sure that you are well diversified, not only in the types of investments you hold but across geographies too.
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