Do you want to earn an extra R5,100 per month from simply opening an SMS
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You won't have to crunch any numbers...
You won't have to calculate anything...
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The “Retirement Plan B” fund I’m talking about …
A Tax-Free Savings Account (TFSA).
I’m sure you’ve heard it all before. But I’m not just talking about any TSFA.
You see, you could invest in a Deposit TFSA from your local bank, but there are limitations with this:
Firstly, the highest return you’re likely to receive is around 8%-9% - and that’s only if you invest high amounts.
In addition, the longest investment period is 12 months. That means, you would have to go through the hassle of re-investing in a deposit TFSA, every year for the next 15 years.
Or you could invest in a TSFA via Unit Trusts. But there are also disadvantages to doing this…
Firstly, managed investments like a unit trust cost a fortune in fees. You don’t only have to pay a fee for investing in the fund, but also an advisor fee.
Before you know it, you’re paying 2% in fees. Add this to the fact that 80% of fund managers underperform their benchmarks and your overall tax-free returns after 15 years may look dismal.
A switch to this TFSA could add an extra R200k –R500k to your nest-egg
I’m talking about investing in exchange-traded funds (ETFs).
With ETFs, you won’t pay exorbitant fees associated with unit trusts and a good selection of ETFs will provide you with a better return than unit trusts and deposit accounts.
In addition, ETFs allow you to invest small amounts every month, which may be more affordable than one massive lump-sum.
The yearly investment allowance you can invest tax-free is R33,000. This means, you can invest R2,750 a month. In total, that would equal to R495,000 over 15 years.
So let me explain using a rough example of ETFs exposed to local, offshore shares and local property…
Obviously past performance doesn’t equal future performance. So to counter that, let’s take 3% off the average returns of ETFs.
Now let’s say a Deposit Account gives you 9% interest a year and a Unit Trust returns 10% a year. This is how your Retirement Plan B could look after 15 years:
You can see investing in ETFs (even with a lower average return) would still make you over R262,000 more than a Unit Trust and over R500,000 more than a Deposit Account.
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How should you build your Retirement Plan B Fund?
Well, it all depends on two main factors - your age and risk tolerance.
1) Age: If you’re 60 plus then you’re already retired or approaching retirement soon. So to wait 15 years for the returns, when you’re more than likely need the money now, isn’t the best option. A deposit account might be more suitable. But if you’re in your 20s, 30s, 40s and 50s, then building a tax-free Retirement Plan B fund with ETFs is a great option.
2) Risk tolerance: The ETFs I used above are just an example. Obviously the ETFs you choose will depend on how much risk you can stomach. But as a general rule, a good mix should include local and offshore shares and property for growth. Dividends and gold for safety.
The fact is, whether an ETF tax-free investment account route makes an extra R50k, R100k or R500k… it’s extra income and a Retirement Plan B you simply can’t ignore!
See you next week,
Josh Benton, Real Wealth