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You wouldn’t jump out of a plane without a parachute, would you? No, me neither. Your instinct of self-preservation would kick in, preventing you from taking a very stressful, adrenalin-filled plunge to an untimely demise.
So then why do we go through life without the proverbial parachute strapped to our backs? I’m talking about insurance, of course. Life is rather fond of throwing obstacles in our path and insurance can often assist us in navigating those hurdles.
A fortnight ago, my mother borrowed my car to nip down to the shops. Ten minutes later, she was back and in great distress. On her way to the grocery store, a small accident had occurred. Thankfully, she and the other driver were unharmed, with my dear car taking the brunt.
No matter – accidents happen. And that’s what insurance is for. The excess was a drop in the ocean compared to the cost of repair. Thankfully, the car was insured – something a lot of South Africans neglect.
Now, my intention is not to sound self-congratulatory or smug. Quite frankly, had I not been insured, I’d be sitting with a damaged car and an alarming quote from a panel beater.
Insurance – not just car cover – is so important. It protects from financial turmoil and the uncertainty that life throws at us. What’s more, that monthly premium guarantees your safety and security should the worst happen. The main types of insurance people usually take out are home, life, car, and medical insurance. Let’s unpack the benefits of all four:
I have a GEPF pension fund, currently at R1.8mn and a retirement annuity at R200,000. I would like to know if I can invest all of the above to receive a monthly pension. I currently earn R326,000 per annum and my overtime is about R80,000 per annum. How should I structure these amounts to receive R18,000 a month?
I want to be tax efficient in all aspects.
Let me start by saying that I am not a financial advisor, and therefore I am not qualified to give financial advice. Please consult a qualified financial advisor to help you structure your finances according to your personal objectives and risk tolerance. But let me give you a few points to consider. In order for you to draw R18,000 from an investment portfolio of R2.9m, it will need to produce a pre-tax return of 7.45%, if you do not want to draw down on the capital (18k x 12/2.9m). Assuming an effective tax rate of 25%, this return becomes 9.93%.
Ideally, you would want the portfolio and the income drawn to grow by inflation to maintain its purchasing power. Therefore, you should add 4-6% to this required return, depending on your expectation of inflation going forward. This return requirement is quite steep, given that money market rates are roughly 4% currently. Bringing this back to your question about asset allocation, it means that you will need to allocate more heavily to growth assets like equities, in order to meet this target over time. Over the long-term, equities have proven their ability to generate inflation-beating returns.
However, it is important to remember that a broad, globally-diversified portfolio will give you the best chance to adequately provide for retirement. This is all food for thought to discuss with your qualified financial advisor.
I am keen to start investing, but I have no idea where to begin? I’ve thought about starting small, with R500 p/m. Where should I start and what is a good first investment?
Excellent that you want to make a start. Investing as early as possible when you start earning an income is great as compound interest allows your account balance to snowball over time. The earlier that money starts working to make more money, the better off you will be down the road. There are many options to start for R500 per month, but a tax-free savings account (TFSA) is an excellent choice because of the tax efficiency it offers.
You can open a TFSA with the majority of asset managers in South Africa or your bank, subject to a maximum contribution limit of R36,000 per year. This investment would be entirely liquid, and you will not be liable to pay any tax on the returns earned within this product. It is important to choose an investment strategy that will suit your saving goals and time horizon.
If you are young and starting to invest for the first time, you are able to seek out bigger returns by taking on bigger risk and can therefore invest more in riskier asset classes such as equities. This is because you are in a position to ride out volatility and have time to recover the losses through income generation. Read more about the value of a tax-free savings account in an overall financial plan.
- Johan Steyn, CFA is a lecturer in investment management, from the department of business management at Stellenbosch University. He holds a Masters in investment management and has a background in fund management. Josh MacRae is a financial advisor at Brenthurst Wealth Management.
Have a question about share investing? Write to me at [email protected].
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