Retirement strategy for an expatriate
A Fin24 user writes:
I am 40 years old. I work in the offshore field, mostly in the oil and gas side of things in a supervisor capacity. My yearly income is anywhere from $90 000 to $120 000 per year.
My current monthly expenses at home in SA are much like any South African: life insurance, medical aid, car repayments and so on, around R40 000 to R50 000 per month.
This will change when I have paid off my bond and by the time my son finishes school, the wife and I would like to downscale to a smaller house and cut some of our expenses.
I have never had any retirement fund or investment fund before.
I am looking for ways to put money every year into an investment for my retirement from offshore work and the offshore lifestyle in 15 years’ time.
The way I would like to do this is by making payments, maybe two or four times a year, when I have money available to do so.
These payment can be as little as R20 000 to R30 000 and as much as R50 000 to R100 000 at a time, depending on R/$ exchange rate or my current work contract.
Would you be able to help with some direction as to which investment would be best, with maximum returns?
I am not too interested in the normal 10% to 15% return from some investment, as by the time you have paid all the parties involved – management/performance fees, taxes on interest earned and inflation – that percentage comes way down.
Like other Fin24 users, I also don't want to pay a middle man who has no obligation to check my portfolio for doing nothing. Is there a company that will look well after the small investor?
The dividends can be reinvested into the account as I don't want to touch the money I invest for at least 10 years.
Mannie Kambourakis, Sanlam market specialist for senior market advice, answers:
It is not clear how much of the year you spend working overseas, as the time spent abroad would determine whether you are subject to SA income tax.
For the purposes of this response I am assuming that you are a South African taxpayer.
One of the finest - but much-maligned - investment vehicles available when planning for retirement is the retirement annuity (RA) as it offers numerous tax advantages.
A financial adviser would be able to describe all its features, but I will touch on a few.
Your contributions would be pre-tax as you are in the 40% marginal tax bracket, so every R1 you earn would not be taxed should this R1 be invested in an RA.
Effectively, the 40c that would have gone to the taxman is now instead invested for your retirement, representing an immediate financial gain for you.
Had you invested in, say, collective investments directly, your contribution would have been 60c as your R1 income would have been taxed first.
If you are not a member of a pension fund, you may contribute 15% of your taxable income into an RA and receive the tax relief described above.
You need to be aware that you may only access your retirement funds from age 55 and you may only access – in a lump sum – a maximum of one-third where the first R315 000 is tax free and the balance is taxed on a sliding scale.
The remaining two-thirds must provide you with a pension which would be taxable as income.
Should you require unlimited access to your investment before the age of 55, an RA would not be the way to go and you should rather consider investing in collective investments.
As with RAs you may make ad hoc contributions as you envisage. You may also consider a combination of collective investments and an RA.
Your expectation of a consistent return in excess of 15% is not realistic and you would need to be invested in a high-risk equity portfolio.
There will be times where you would achieve these returns and times when you would not. At the very least, one must aim to achieve returns in excess of inflation.
With the time available to you – about 15 years – it would be advisable to be invested as aggressively as possible bearing in mind, however, that legislation in the form of Regulation 28 prevents your RA containing more than 75% in equities.
Your retirement fund at age 55 should be sufficient to look after you for another 25 to 30 years considering current life expectancy. As a rule of thumb, 20 times your annual income requirement is needed.
Let’s assume that by the time you retire, and after downsizing and eliminating your bond, you would have halved your expenses to R25 000 in today’s terms, then this R25 000 would translate into R69 000 per month at age 55.
This means the retirement fund required would be R16 560 000. I have assumed 7% inflation and a 10% investment return on your retirement fund.
It is for this reason that you need the services of a suitably qualified financial adviser. Such a person would advise you appropriately on all matters outlined as he or she would be in a position to advise on the tax implications as well as limitations on the investment products available, and to assist you with your choices.
A financial adviser would also provide guidance on the selection of funds to match your personal risk profile and monitor the progress. His or her role is also to consult with you, providing you with relevant feedback at least once a year to ensure that your investments are on the right track and meeting expectations.
The fees payable to such an adviser are transparent and can be negotiated, but you need to clarify what your expectations would be and to understand what your adviser can deliver.
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