MONEY CLINIC | I lost all my investments. How should I save for retirement now?

A Fin24 reader who has had a financial setback due to the Covid-19 pandemic wants to know how to best invest the R10 000 he has available to save monthly.

He writes: 

I am 57 years old. Due to the Covid-19 pandemic, I have lost all of my investments and have no retirement funds left. I do have a secure job and will work until the age of 65, health permitting. 

I have R10 000 available monthly to save. How can I maximise my savings? 

Do I buy a residential property? 

My wife has a provident fund which is worth R500 000. Do I add this to her fund or start my own? 

Paul Leonard CFP® Advisory Partner at Citadel, responds: 

I am sorry to hear about your setback. Unfortunately, eight years is not a lot of time to allow compounding to work, so you will also need to employ other strategies.

The objective is to find ways to generate an income after age 65 that will sustain your lifestyle. This income could be from multiple sources and have active and passive components.

I will start with two available options for your R10 000/m savings. Be aware that I am sharing some general ideas based on the minimal information contained in your question. This is not financial advice. I can’t give you financial advice without understanding your full financial circumstances.

You could indeed purchase a residential property. Let’s say you could buy a rental unit for around R800 000 with a 100% mortgage bond over 10 years at 8% p.a. the instalment would be R9 800/m (rounded up). If you could get a net rental of 8% of the purchase price, your net rental would be R5 300/m, meaning that you would need to use R4 500/m of your savings to cover the balance of the bond instalment. 

If you increased the instalment each year, you could potentially pay off the bond by the time you turn 65, giving you an unencumbered rental income.  

The remaining R5 500/m could be invested elsewhere. You will not be able to invest in your wife’s provident fund since that is an arrangement she participates in via her employer. You could invest in a retirement annuity in your name and get the advantage of tax breaks on the contributions.   

If this results in a tax refund, you could put that refund into the rental property’s mortgage bond. By investing as aggressively as you can within the constraints of regulation 28, your portfolio will have the potential to give you a higher return and grow your capital more. By using a unit trust-based structure, your contributions could also be temporarily stopped at short notice and without penalty if your property was untenanted, and you needed to cover the full bond instalment yourself for a month or two.

These are just two options.  

However, I suggest that the best way to find an optimal solution for you is to go through a formal financial planning process with a suitably qualified financial adviser where you do scenario planning in which you play around with these and other multiple options that are available to you. 

This will help you understand which of the options are likely to have the biggest impact on your circumstances to focus your attention on those options. You could also stress test the scenarios by asking what things would look like if a particular option failed, and in so doing, you could get a sense of the risk, and you could evaluate whether you will be willing to take on that risk or not.

The way you frame your question is also important. Instead of asking how you can maximise your savings, consider rather asking how you can maximise your income after age 65.  The answer may change. For instance, if we consider the property example above, your tax savings and overall returns will be maximised by not settling the bond quickly, however that doesn’t solve your income problem. Your income problem is solved by settling the bond before you turn 65.   

The way you view asset management is another important perspective. The three-stage life of learning, earning, and retiring is undergoing an overhaul. Instead, people are adopting a "portfolio" life. They are looking at asset management in a much broader and fresher way. Don’t just consider your tangible assets such as money and property when solving this puzzle: look at intangible assets as well, such as your career capital, network, non-work skills, your energy, your health. Look at your whole assets (tangible and intangible) portfolio and see which of those could generate income for you beyond age 65. 

It might be possible that by investing into some of your intangible assets, you will be able to create a new active income stream beyond the age of 65 that will match your energy levels at that time.

These options can be modelled in financial planning software to help you understand which investments into which assets can potentially give you the biggest "bang for your buck" while solving your retirement income puzzle. 

Questions may be edited for brevity and clarity.