Question over retirement

[silbo]

I am in a position to comfortably invest 27.5% of my income to an RA in 10X which ( 5% is mandatory by my company), there is no match.However, I am going financially strong and I believe that I should be able to retire by age 45-50.

My concern is, I just feel like only being able to get 1/3rd of the RA at 55, and getting the rest in payments after 65 seems dumb, if I only live to be 68, then I would have 9 Million rand over 3 years for example.

I would prefer to have this money sooner ( or as a part of my portfolio) so that i can withdraw money every year without really losing money , if i for example have 25x my yearly earnings in the stock market) ie:4% rule.

Should I still continue to invest 27.5% or rather invest most of that money on my own to get to a point where i have 25x my yearly earnings in ETF's for example.

I have calculated that I would need 9 - 12 M in my portfolio to be able to live indefinitely "off of the interest"

 

[alfiano]

@silbo A few points:

1. RA decision depends a lot on how old you are, what your marginal tax rate is, and what your marginal tax rate will be in the future (ie. will you have a higher one and for how many years). I can comment more if you provide this info.
2. 4% rule is for a 30-year retirement in the US and is likely to be unsuitable in the future (see Ben Felix's videos on the topic), 2.7% I think is suggested for a 30 year retirement. If you're retiring at 45, that figure will be lower as you'd want to make sure you don't run out of money before 90. (Though if you're able to materially reduce your lifestyle if the market goes against you, 4% is probably fine.)
3. Not saying you are, but just a note - 4% rule certainly won't work out if you're planning on investing in money market or just bonds - it was based on a 60/40. Some arguments that 100% equities is a better strategy in retirement if you can stick with it.
4. You can withdraw RA from 55 and no quicker than 17.5% (besides the 1/3rd lump sum). The faster you withdraw, the more tax you pay.

 

[silbo]

@alfiano I'm 33.
My RA Balance : 200k
My Investments : 700k
Options
Investing 14k onto RA and 15k into Invest/ETFs
Or
Investing 8k onto RA and 20-22k into invest/ETFs

I don't know if I trust our government enough to reply on them paying me millions in 15 to 20 years lol

 

[alfiano]

@silbo Edit: I've deleted the rule of thumb as I really should finish the model first and I may have made mistakes.

As for government trust, don't let paranoia influence your investment decisions. It's fine to put your eggs in multiple baskets (ie. split the difference between RA overcontributions and taxable accounts, especially good as a strategy to lower your SA equity exposure to a more reasonable 10-20%), but don't neglect the RA completely. Treasury has been very even-handed over several decades.

 

[silbo]

@alfiano I mean I earn 69k , 33 yo so does this mean I have to max it given I only have 200k in my RA.
Also my employer does not do any form of a match

 

[alfiano]

@silbo Likely RA is a good choice unless you will earn over R2mp/a in future. I’d go TFSA, then 50/50 RA/taxable.

 

[silbo]

@alfiano I think i will hit max tax bracket in like 5 years I'd hope. Also I started this year with tfsa I only realized a month ago how OP it is haha. So I will have 72k in TFSA Starting next month. And yeah have no debt and emergency fund and like I said 700k or so in investments. So do u think I should raise it or retire on my own investments early kinda thing

 

[alfiano]

@silbo Raise what? I’m a big fan of FIRE, work to live not live to work, and if you don’t have to work to live, don’t.

If you’re going to be earning >45% for the last ten years of your career, then rather max out RA then.

 

[silbo]

@alfiano Makes sense but like I don't Wana wait for 55 I Wana retire in 12 - 14 Years

 

[alfiano]

@silbo You realise you have to live beyond 55? The money has to come from somewhere. I’m not suggesting 100% RA.

Just plan to withdraw at a greater rate from your taxable savings until you hit 55.

 

[silbo]

@alfiano Yeah but If I can get to 10M in my portfolio. I can technically draw 4% per year in perpetuity without losing any money as my gains is more than my expenses.
Which on a 10% return with 700k and 25k pm for 14 years I would be able to reach that right?

 

[lovedaisies]

@silbo The part of the RA you don't take as a lump sum is converted to a living annuity from which you draw an income. I believe that can happen at age 55 - you don't have to wait to 65. Experts confirm? You can draw down up to 17.5% of you living annuity which would empty it out quite quickly. Depending on the actual rand amounts, there will likely be tax implications.

In any event you should be investing some money "after tax" outside your RA as well. This would be an additional lump sum that you can use at your discretion.

 

[saidagha]

@lovedaisies

You can draw down up to 17.5% of you living annuity

Per year, I assume?

So you can empty your whole retirement in 5 years and 9 months, if you want.

Probably what most people do is withdraw just a little more than they think they'll need each year, and the just reinvest what they don't need into another annuity.

 

[lovedaisies]

@saidagha 17.5% per annum of the *remaining* amount, so you can draw down less and less as a rand amount each year, until the annuity reaches R50000 at which point you can draw it all.

Well, less and less depending on the growth in the RA as well.

 

[saidagha]

@lovedaisies Wait, so that seems pretty bad to me actually. So you can never actually get all your money out then?

 

[lovedaisies]

@saidagha Once it drops below the threshold (I said R50k above, but it's actually around R120k now), then you can take it out as a lump sum. The problem is that the previous year (before it dropped below the threshold) it was probably around R145k, meaning you could only withdraw around R25000 from it for the whole year...

 

[saidagha]

@lovedaisies Those are some ridiculous rules.

So basically it's going to be important to not only rely on RAs. Will be good to have some stock you can sell whenever you need to.

 

[gracer]

@silbo Your tax benefit is lost if your RA is too large, as you'll pay high income tax on withdrawal. Push it to a limit where income tax will be around 30% on withdrawal, then put rest into ETFs.