Author Topic: Retirement annuity - what's the consensus?  (Read 6991 times)

Strive

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Retirement annuity - what's the consensus?
« on: November 05, 2015, 03:00:03 pm »
Hey everyone - newbie investor here. Been lurking for a while, but I've decided to participate a bit and see where that ends up.

I am thoroughly confused as to what to do with my RA. I've had one for years now, but the fact that I can't touch it until I'm 55 burns me deeply. I'm 32, and I plan to retire well before then, and I can't help but think that having the money now to invest as I please might outweigh any benefits that an RA provides.

What would you guys do? Do you keep the RA, pump as much as you can into it and take advantage of the tax benefit, as well as carry on investing in equities/property/what have you? Or do you cancel the RA, get the money out, take the hit, and then pump it into other investments? Or is that just a terrible idea, as every financial advisor I've spoken to seems to believe?

--

On rereading this, I realize this is a tad open-ended  :P No one can say for sure what to do without a lot more information. I guess I'm just looking for people's opinions here, as opposed to any hard and fast rules. What have others done? What worked, what didn't work, that sort of thing. If the consensus is, RA's all the way, then that's great :)
« Last Edit: November 05, 2015, 04:16:56 pm by Strive »

Patrick

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Re: Retirement annuity - what's the consensus?
« Reply #1 on: November 05, 2015, 04:29:53 pm »
You might want to take a look at the early retirement thread here: http://shareforum.co.za/shares/when-do-you-have-enough/

In my view it doesn't really matter when you can touch the money, as long as it's well invested up to that point. Say you need R15 000 a month to live on, or R180 000 a year. We could fudge some numbers and say you'll need to draw down R200k a year before taxes.

If you want to be reasonably safe you could choose a 4% draw down of all your assets, meaning you'd need R5mil to pull out R200k a year. Now you can imagine that you might have R2mil in an RA and R3mil in a regular account. Technically it doesn't matter how you pull your 4%. If you're only 40 you would have to pull all of it from your regular account. That means you're drawing down 6.7% of that account, and it'll likely eventually be emptied.

But, fortunately, while you've been doing this, your RA has still been growing, so that by the time you hit 55, your total net worth is actually far higher than it was at 40, the only difference is that now you have more money in your RA than in your taxable account.

What you need to figure out is what will the tax saving be in your RA, as unfortunately RAs are designed to under perform the market as they can only be 75% in equities. It's hard to say how much it will under perform by, but if you're in a high tax bracket then probably not enough to make you ignore it. You can try run some numbers on erwintr's spreadsheet here: http://shareforum.co.za/shares/tfsa-vs-ra-vs-satrix-calculator/

Anyway, that's all the theory. In practice, I don't have an RA. For some rather complicated reasons, the RA wouldn't reduce my tax burden, so I am an exception. That said, I really do like the fact that I can manage my own money. I personally see RAs as ways to give fund managers guaranteed income. The fees are often ridiculous, and the growth middling. And if you make the wrong call, switching from one to another can be really painfull and expensive.

If I needed one, I'd look at the lowest cost option, made up of passive indexes. I think Sygnia has RAs like this, but I'm not sure who else does.

Out of interest, have you maxed out your tax free savings account yet? I think there's pretty much a universal agreement that those are excellent.

Strive

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Re: Retirement annuity - what's the consensus?
« Reply #2 on: November 05, 2015, 07:15:07 pm »
Hi Patrick - are you the Patick from the investor challenge blog? That's some interesting reading right there, and pretty much the first South African viewpoint of early retirement I've managed to find - sweet!

As for the tax free savings account, man, my financial advisor didn't seem so keen on them. I've reading about them, on your site and others, and yeah, they look like insane vehicles for investing. I guess he didn't recommend one because he wouldn't get to take his cut of it, but I'm certainly going to be looking at them closely now. If I had to open one up now, with, say, Easy Equities, would I be able to pump in R30K before the end of the year without running into any penalties?

--

Also, checked out that spreadsheet - that's a marvelous piece of work, and it looks like I'm in a slightly more precarious position than what I thought  :P Taxes are a bugger.
« Last Edit: November 06, 2015, 07:22:41 am by Strive »

Nivek

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Re: Retirement annuity - what's the consensus?
« Reply #3 on: November 06, 2015, 07:34:59 am »
If your adviser is against a TFSA get a new one, or just do it yourself. TFSAs are like free money.

Patrick

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Re: Retirement annuity - what's the consensus?
« Reply #4 on: November 09, 2015, 09:23:00 am »
Yeah that's me, and yes, you can put the whole R30k into your tax free account at one time if you like. Just make sure you do it before the 28th of feb, else you'll be using next years allowance.

erwintwr

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Re: Retirement annuity - what's the consensus?
« Reply #5 on: December 03, 2015, 07:42:07 pm »
Hi Patrick

*snip*


Also, checked out that spreadsheet - that's a marvelous piece of work, and it looks like I'm in a slightly more precarious position than what I thought  :P Taxes are a bugger.


Glad i could help :)

have added a few updates in the last week or two. maybe run your numbers through it again to see where an RA will benefit you best.

As Patrick mentioned though  - high Fee's and low performance is drawbacks.

JohnnyH

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Re: Retirement annuity - what's the consensus?
« Reply #6 on: December 08, 2015, 07:26:33 am »
Morning All

Strive, hope you don't mind me hijacking your thread, but the RA question has been haunting me for a long time as well.

Have any of you guys had a look at the offering from ETFSA-RA (attached)? Its just a bunch of ETFs, with a few familiar faces in there as well, DIVTRX, DBXWD, etc. Granted the current weightings are quite low, but still. I feel with this, I can see exactly what they hold etc.

The other main thing I like is the cost, 0.85% all in ( I think vat still needs to be added though, so could be a max of 0.97%.
If I compare this with my current RA cost of, wait for it, 3.2%!!!  :mad: I feel like I am already winning.

I do like the idea of having at least some of my money in a RA, but currently my contribution is sitting at 12%, the rest going to equities.

Comments guys?

gcr

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Re: Retirement annuity - what's the consensus?
« Reply #7 on: December 08, 2015, 09:28:13 am »
You also need to look at the fees that you will be hit with should you decide to extend the "life" of your RA. I had what was called an old order RA which I took out at age 32 and contributed until age 55, then extended the life of it to age 60 and then to age 65 - fees were levied to extend the life each time. When I wanted to extend to age 70 the fees would have gone up by a further 4.5% so I had it converted to a LA with the regulatory minimum draw down of 2.5%. Two things I have learnt about RA's - the fees were/are exceedingly high and the internal rate of return is pretty pedestrian. If ETF were available 36 years ago I would definitely have gone that route, the old order RA's were/are an absolute cash cow for the insurance company peddlers
Supposedly the new order RA's are better but would I advocate them - no not really because in 30 years time one may well find that there are some serious deficiencies with them, as there have been with the old order products
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JohnnyH

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Re: Retirement annuity - what's the consensus?
« Reply #8 on: December 08, 2015, 09:46:00 am »
You also need to look at the fees that you will be hit with should you decide to extend the "life" of your RA. I had what was called an old order RA which I took out at age 32 and contributed until age 55, then extended the life of it to age 60 and then to age 65 - fees were levied to extend the life each time. When I wanted to extend to age 70 the fees would have gone up by a further 4.5% so I had it converted to a LA with the regulatory minimum draw down of 2.5%. Two things I have learnt about RA's - the fees were/are exceedingly high and the internal rate of return is pretty pedestrian. If ETF were available 36 years ago I would definitely have gone that route, the old order RA's were/are an absolute cash cow for the insurance company peddlers
Supposedly the new order RA's are better but would I advocate them - no not really because in 30 years time one may well find that there are some serious deficiencies with them, as there have been with the old order products

Thank you for the reply gcr, much appreciated. I am 31, so I have a few years to go still :)

Luckily I can move my RA without any penalties, but I do realise that unfortunately, nothing these days are buy & forget, or at least, not often. So I will be keeping a close eye on all my finances.

erwintwr

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Re: Retirement annuity - what's the consensus?
« Reply #9 on: December 10, 2015, 12:55:31 pm »
Morning All

Strive, hope you don't mind me hijacking your thread, but the RA question has been haunting me for a long time as well.

Have any of you guys had a look at the offering from ETFSA-RA (attached)? Its just a bunch of ETFs, with a few familiar faces in there as well, DIVTRX, DBXWD, etc. Granted the current weightings are quite low, but still. I feel with this, I can see exactly what they hold etc.

The other main thing I like is the cost, 0.85% all in ( I think vat still needs to be added though, so could be a max of 0.97%.
If I compare this with my current RA cost of, wait for it, 3.2%!!!  :mad: I feel like I am already winning.

I do like the idea of having at least some of my money in a RA, but currently my contribution is sitting at 12%, the rest going to equities.

Comments guys?


They are a bit new on the market, but the Sygnia Skeleton 40 to 70 index funds is reg.28 compliant, and only has 0.4% fee's.

http://www.sygnia.co.za/wp-content/uploads/2015/11/Sygnia-Boutique-Fund-and-Fee-Summary-Nov-15.pdf

http://www.sygnia.co.za/wp-content/uploads/2015/11/2015-OCT-SKL70UPF-Sygnia-Skeleton-70-Fund-UPF.pdf


But yes difficult to determine who they are investing in. Hope they add it to their Fact Sheet soon :)


JohnnyH

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Re: Retirement annuity - what's the consensus?
« Reply #10 on: December 10, 2015, 01:35:33 pm »

They are a bit new on the market, but the Sygnia Skeleton 40 to 70 index funds is reg.28 compliant, and only has 0.4% fee's.

http://www.sygnia.co.za/wp-content/uploads/2015/11/Sygnia-Boutique-Fund-and-Fee-Summary-Nov-15.pdf

http://www.sygnia.co.za/wp-content/uploads/2015/11/2015-OCT-SKL70UPF-Sygnia-Skeleton-70-Fund-UPF.pdf


But yes difficult to determine who they are investing in. Hope they add it to their Fact Sheet soon :)

Thanks for the suggestion erwintwr. I have looked at them before as well. Liked the low fees also.

I see the Skeleton 70 has a CPI +5% target. The ETFSA-RA funds range from CPI +3% to +7%, so I liked the idea of having something aggressive & high risk seeing as I have ~30 years before retirement.

That being said, I still very much want to "retire" earlier, but it doesn't look like Zuma will allow me to do so. Sigh.

Strive

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Re: Retirement annuity - what's the consensus?
« Reply #11 on: December 11, 2015, 08:14:14 am »
As a matter of fact, I've transferred my RA to Sygnia -  I've chosen the Skeleton 70 index fund, with a TER of 0.4%.  By far the best option, as far as I could tell, seeing as this is a 20 year commitment. Although, with the passing of Nene and the subsequent glimpse of the incoming future, I really am wondering if there'll even be anything left a couple of decades from now. Happy Friday! :P