A Fin24 user wants to make sure that his father makes the right investment choices for his retirement. He writes:
My dad is 54 and will retire at 60. He has a bond of about R600 000. My brother will finish his studies at the end of this year.
My dad will thus have roughly about R6 000 a month to either invest in the Allan Gray Balanced Fund or to pay off his bond.
Which option will put him in the best financial position by the time he retires?
Andries Cilliers, financial planning analyst for senior market support at Sanlam, responds:
It is not an ideal situation to have debt at your retirement.
When considering the option between the repayment of debt as opposed to saving, there is only one question to be answered. Will the net yield on the savings be higher than the interest on the bond or not?
Now let's take your dad's situation.
I assume the bond is on your dad's primary residence.
Should your dad invest the additional R6 000/m on the bond (assuming a total of ± R10 800/m with the usual payments of ± R4 800/m), the bond should be paid off in ± 69 months' time (just before his retirement) if an interest rate of 7.5% (prime minus 1%) at all times is assumed.
If one looks at the history of average performances of the Allan Gray Balanced Fund (and other balanced funds with at least 50% exposure to equities) over any six-year term in the past, it should most probably outperform the current low bond rates over the next six years.
On the other hand, interest rates can turn around very quickly.
If I were your dad, I would rather opt for the more conservative approach and repay the bond before my retirement.
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