By Sanlam Investments, 8th December 2014
Not knowing whether you’ll have enough income for life is a growing cause of anxiety for South Africans, particularly as we are living longer than previous generations and now have more adult and child dependents even after we’ve retired. The best cure for this concern is to start early and make sure you get good financial advice. Investing for income needs to be approached differently for those still working than for retirees.
The first rule of saving towards a comfortable retirement is to start early, preferably from your first pay cheque. Depending on your circumstances, it may now be too late for this, but then make sure that you save more than the 5% or 7.5% minimum compulsory contribution set by your employer. This could significantly bring down your tax bill during your working life, while motivating you to put more money away from which you can draw a greater income during your retirement years.
Postponing retirement and therefore saving for longer can make a dramatic difference. For example, when you’re invested in a product that provides you with a return of 10% p.a. on average, you will nearly double your retirement capital by postponing retirement and leaving the money invested for another seven years.
Make sure you’re taking on enough risk in your investment portfolio to not only beat inflation, but to maximise your average annual returns in relation to the amount of short-term volatility that you are willing to stomach. Remember, the longer you remain invested, the less important short-term volatility becomes, and the more risk you should be able to take on. Speak to a financial planner to discuss appropriate investment options for you.
When you retire, legislation will force you to invest at least two-thirds of your retirement capital in either a guaranteed life annuity or a flexible living annuity. Whichever option you choose, make sure that your income levels will sustain you for life. A common error with a living annuity is choosing too high a drawdown percentage in the light of the return offered by your investment portfolio and your expected longevity. The investment industry’s table on living annuity drawdowns will help you to choose an income level that lasts.
People with less investment experience tend to invest only in familiar products, such as money market funds and fixed bank deposits. The problem is that the interest or returns on these products seldom beat inflation – certainly not after tax. To beat inflation, you need to look wider at more diversified sources of income and growth, such as inflation linked bonds, government and corporate bonds, listed property and shares. Your financial planner will show you how to enhance the return on your investment without taking on more risk than you’re comfortable with.
If you’re drawing income from a unit trust investment and you’re under the age of 65, you pay no income tax on the first R23 800 of interest earned. If you’re 65 years and older, the exemption amount is R34 500. As far as your dividends from an SA unit trust investment are concerned, dividend withholding tax at a rate of 15% is subtracted from the dividend and automatically paid to SARS on your behalf. If you’ve made a capital gain, you will also become liable for capital gains tax on a withdrawal from your unit trust. In comparison, if you’re drawing income from a life or a living annuity, you’re taxed on your total taxable income according to SARS’s income tax tables (updated after the budget speech every year).
Your financial planner will help you optimise your income while keeping in mind longevity, risk and tax.