At 35, would a 5 or 10 year RSA Retail Bond be a good investment?
Thanks for your question.
The money market account I referred to in the above article refers to either money market accounts with banks or money market trust funds that have current yields of around 4.4%. without a fixed term. These funds or accounts are linked to the repo rate and follow the upward and downward movements of the repo rate. Money market accounts with banks have a variable rate of return based on the amount invested, while money market funds based on mutual funds have a fixed unit price regardless of how much you invest.
I did not include term deposits as their returns vary widely depending on the term and institution.
As a long-term investment, cash in any form is not ideal, especially if you are under the age of 65, due to the tax on interest earned.
The only time money in the form of a money market or term deposit account makes sense is when the investor is exempt from tax or when you are saving funds to spend on something. thing over the next two years.
When the funds are invested in a special trust for a minor child or a person with special needs or an NGO, the interest-bearing investments can be justified because no tax is applied in these structures. These types of investments are often defined as the preferred investments prescribed in the trust deeds of these vehicles.
Once you consider investment periods longer than five years, you enter the âgrowthâ space of the investment environment.
In my opinion, a 35-year-old man who is over 20 years old before his retirement should focus on high-growth assets like stocks and commercial real estate, and healthy overseas exposure.
Retail bonds are good solutions for retirees who need income and who benefit from additional tax breaks. Retail obligations are imposed in exactly the same way as cash and term deposits. I would hesitate to invest in a five-year fixed retail bond under current conditions. The repo rate was recently increased by 0.25% and is expected to rise for the foreseeable future, making the 8% retail bond unattractive.
Interest rates can easily approach and exceed a prime rate of 10% over the next two to three years, depending on inflation. Indexing to inflation allows you to stay ahead of inflation, but the margin decreases depending on your tax rate. If your tax rate is 30%, the yield on inflation + 4% on retail bonds suddenly drops to 6.3% in total if inflation is 5% (5% + 4% = 9% – tax rate of 30% = 6.3%).
The same applies to a 10-year 8% retail bond. Your return will be reduced to 5.6% if you are taxed at 30%. The only difference now is that you are stuck for 10 years in an interest rate cycle that is sure to return to normal levels. Remember that before Covid, the average money market rate was close to 10% per year.
Retail bonds make sense when you’re retired. The fact that they are guaranteed by the government makes them a safe investment with a decent return (according to tax). I would not suggest, however, investing in retail bonds as a mechanism for future retirement.
Given your age and depending on your investment horizon, you should aim for returns above inflation + 6% net (after tax) as an investment objective for retirement provision. No cash or interest-bearing investment will consistently deliver this after tax.
If you are very conservative and cautious about growth funds, look at income funds and small cap multi-asset funds instead. Read the article âInvestments: Beware of the Cost of Conservatismâ you referred to again and think about why it is so important to have a fair amount of exposure to growth assets locally and to the abroad while you invest for retirement.
The lower your return, the more you need to invest to reach your retirement goal.
Example: If you need R125,000 per month in 25 years (the equivalent of roughly R37,000 today at 5% inflation), you will need approximately R37 million in 25 years. Assuming that at age 35 you have so far reached 1.5 million Rand (the target where you should be at 35 if you earn 37,000 Rand per month and want to retire at 60) and that you plan to retire at age 60 then the following month’s contribution will be necessary to reach your goal:
- Future value of current provision at 8% yield = 10.2 million rand (shortfall = 26.8 million rand)
- Future value of current provision at 12% yield = R25.5 million (shortfall = R11.5 million)
To fill the gap, the following contributions will be required:
- If you get 8% return per year = R16,400 per month required.
- If you reach 12% per year = R9,500 per month required.
The numbers speak for themselves. However, don’t be fooled by the numbers. In effect, you will start contributing at a lower level and increase contributions as your income increases. I used a leveled contribution calculation just to convey the importance of decent returns and what the implications of being too conservative.