I’m crunching some numbers on my retirement savings and I’m looking for anyone to point out flaws in my logic or subtleties I may be missing. In terms of my retirement savings, I believe I have 3 options of putting money away.
Given the return premium on a personal investment above a PF/RA (equity ETF vs balanced fund) and the relatively lower tax rate (18% CGT vs 36% of lump sum), saving for retirement in a personal brokerage account becomes quite attractive for my 35 years horizon. Obviously, putting all my retirement savings in a brokerage account has downsides:
- No forced financial restraint (I can withdraw the money whenever).
- It is not tax deductible, hence I will have larger PAYE.
- All my money will be in equities, but my argument is if a world equity index underperforms a balanced fund over 35 years then something very weird has happened in the financial system.
In my view, I can get more bang for my buck by investing via a brokerage account than putting it into a PF/RA (due to higher annual return and less tax). However, it’s subject to the above downsides. Am I correct in assuming that the optimal retirement plan is a trade off in balancing the higher annualised returns of saving personally and its downsides with the advantages of a PF/RA with the downside of lower annualised return?
In the coming year I am in the fortunate position to save a reasonable amount of money (provided I’m prudent with my monthly expenses). I am planning to divide my retirement savings into PF/RA contribution (10% of gross), TFSA (4% of gross), and personal account (4.5% of gross). I have a decent chunk allocated to short/medium term savings.
I haven’t made any commitments based on the above, but I would like someone to point out flaws in my reasoning/understanding before I embark on my journey.
Retirement vehicles
- Retirement products (pension fund/retirement annuity): The traditional savings vehicle with a max deductible of 27.5%. The funds will be placed in a balanced fund. Tax is payable on the lump sum received upon retirement.
- TFSA: Max contribution of R36 000. The funds go to a an equity ETF tracking MSCI ACWI. No tax. Deposited after tax.
- Personal account: A personal brokerage account where the funds are invested in an ETF tracking MSCI ACWI. Deposited after tax, and capital gains tax incurred at retirement withdrawal.
Some Notes
- The reason for the slant on tracking a dollar denominated index (ACWI) is that I will likely emigrate and thus it’s in my interest to have my savings reflect dollar exposure.
- For tax purposes, let’s assume I am fortunate to retire with a decent chunk and hence both CGT and the lump sum tax will be at the highest possible rates.
- Thus, the tax bill will be 18% (max marginal CGT) of the gains on my personal account and 36% of my lump sum amount. That is, the % tax for CGT will be less than the % tax for the PF/RA lump sum?
- I have 35 years to retirement
- I am assuming there is a risk premium attached to the ETF investments above the balance fund of 2% (i.e. the ETF will fetch 2% more p.a. compared to balance fund).
Retirement product vs personal savings
Given the return premium on a personal investment above a PF/RA (equity ETF vs balanced fund) and the relatively lower tax rate (18% CGT vs 36% of lump sum), saving for retirement in a personal brokerage account becomes quite attractive for my 35 years horizon. Obviously, putting all my retirement savings in a brokerage account has downsides:
- No forced financial restraint (I can withdraw the money whenever).
- It is not tax deductible, hence I will have larger PAYE.
- All my money will be in equities, but my argument is if a world equity index underperforms a balanced fund over 35 years then something very weird has happened in the financial system.
In my view, I can get more bang for my buck by investing via a brokerage account than putting it into a PF/RA (due to higher annual return and less tax). However, it’s subject to the above downsides. Am I correct in assuming that the optimal retirement plan is a trade off in balancing the higher annualised returns of saving personally and its downsides with the advantages of a PF/RA with the downside of lower annualised return?
My retirement plan
In the coming year I am in the fortunate position to save a reasonable amount of money (provided I’m prudent with my monthly expenses). I am planning to divide my retirement savings into PF/RA contribution (10% of gross), TFSA (4% of gross), and personal account (4.5% of gross). I have a decent chunk allocated to short/medium term savings.
I haven’t made any commitments based on the above, but I would like someone to point out flaws in my reasoning/understanding before I embark on my journey.