Did Dale Towert ruin our lives, our business and possibly the ETF industry? Turns out Dale is a powerful guy. He sent a link to the “Investing Demystified” video series by Lars Kroijer and immediately changed the way I think about ETFs.
In the videos, Kroijer makes an argument for a single world-wide ETF combined with bonds as a complete investment strategy. Over the years my ETFs expectations changed. Instead of hoping for market return, as it says on the sticker, I’ve been trying to use my ETFs to outperform the market. In douche parlance, it’s called “seeking Alpha”. In the real world, it’s called “a fool’s errand”.
We didn’t think it was possible to simplify our investment strategy more than our existing ETF portfolios, but in this episode we do. By the end of the conversation, I land on holding the Satrix MSCI World (Developed Markets) and the old school Satrix Top40.
We also discuss a Finweek article sent by Christoff Gouws. The article advises structuring your retirement savings in a more tax efficient way. It inspired me to work out how much tax I would pay on the one third of my annuity I’m allowed to cash out in retirement. The answer horrified me. At my current savings rate, I’ll pay 34.6% tax on the lump sum. This excludes the income tax I’ll pay from the money I earn from my annuity. I used the rates on this page.
At first glance, I’ll be paying more tax I’m currently saving on the lump sum. On the other hand, the 27.5% tax break I’m currently getting is pushing me into a lower tax bracket. That means I pay less capital gains tax - largely irrelevant because I have no intention of cashing in my investments.
The tax I’ll pay on the annuity income is what is going to resolve this issue for me. Currently, the first R117 300 per year received after age 65 and R131 150 after age 75 is tax-free. Presumably I’ll withdraw the tax-free amount every year and supplement my income from other investments. My tax-free savings account will come in handy here, as well as my R40 000 capital gains allowance.
It’s also worth considering the opportunity cost of not making the most of the tax rebate. Can the money I save in the lower tax bracket earn more money than I’ll be paying in tax once I retire?
My head hurts.
If the article inspires you to go through this process and you have more success than I’ve had, please share your calculations with me.
Lastly, Simon talks about an index methodology mailing list in this episode. Subscribe to that list here.
Remember to send your questions to ask@justonelap.com.
Kristia
The below letter from one of our listeners stopped us in our tracks. So often we have no control over the course our lives would take. The challenge is to ensure our finances are in a position to sustain crises. In this episode, we talk about how to spot our own financial weaknesses and how to recover from a financial disaster.
I have always been a HUGE fan of property.
About eight years ago I was doing, I thought, pretty well. I had a high-paying freelance gig (very much the norm in my line of work).
I bought four investment properties and was comfortably funding the shortfall between the rent and the bonds, levies, maintenance and other expenses. That was my road to financial freedom, or so I thought.Then, just like that, the high life ended. I was called into the head honcho's office one afternoon and told they were changing direction and not to worry about coming in the next day. After 10 years, I was given 24 hours’ notice.
Back then I had never heard of income protection and I ended up losing everything. The investment properties, our cars, the house my wife, kids and I lived in. Everything. It was so dire that we had to move back into my parent's house. You have no idea how humiliating that time in my life was. I felt like the biggest loser and failure on the planet.
We slowly started picking up the pieces. We found a small flat to rent, we managed to buy a small, old second-hand car cash. It's been a very long road and we are nowhere near where I want to be financially, but I am pretty proud of what we have been able to achieve over the last year.
For the first time ever, I am going into a new year with a small, but growing, emergency fund. I also now have income protection in place. Another first, I have paid one of my kids’ school fees upfront for the year, thanks to you guys mentioning it on the podcast. That decision will save me 8% on his fees this year. It's been a slog but I finally feel like I am starting to get my head above water.
I also managed to invest a fair amount over the last year for what I planned to be a deposit on a home for my family. We have been desperate to own our own home again and it has been burning my ass 'paying off someone else's bond’ as is often said. It's the one thing about this whole process that has been eating away at me.
I started listening to your podcast late in 2016, so just missed the property one. Thanks to that specific podcast, I've changed the way I look at it and now I'm ok with not owning. I also realise I'm probably better off as there is no way we could afford to own a similar house in the area we're in if we were to buy. We would have to downscale significantly and move quite a distance from the schools our kids are in.
Thanks so much for sharing your experience with the Fat Wallet community. I think we can all learn a lot from your situation. Massive kudos for picking up the pieces smarter and better!
Kris
We received an excellent email from Jason Herron, who has found a way to make Discovery Vitality work hard for him.
I have a little love affair for Discovery miles and thought now that you are using Vitality, it could be useful to you and the listeners.
There is a bit of admin in getting the best Miles collection rate. You will need the following:
- Discovery Credit Card
- Discovery Vitality
- Achieve gold status in vitality and eventually Diamond after 3 years of gold.
I know having a credit card goes against the teaching of your podcast, but have a minimal limit and pay it back in full every month.
When spending on the card you earn 1 mile for every R15 spent.
The key is to get to gold and spend at partner stores. You get 5x miles ie. 5 miles for every R15 spent. Then eventually Diamond
status you get 10x miles so for every R15 you spend you get 10 miles.
The partner stores are very common stores that we all spend at anyway.
- Dis-chem/Clicks
- PicknPay/PicknPay liquor (wine for Simon)
- Shell/BP
- Computicket, Takealot, Ticketpro
- Nando’s
- Exclusive Books
- iStore/Incredible Connection
- Hirsch’s/Coricraft
- BabiesRus, ToysRus, Hamleys, Reggies
- Golfers Club/Pro Shop
- Vida e Cafe (I know you love coffee*)
The best thing about Discovery miles is they can easily be spent at most of these partners. For me, the key is to use them exclusively on travel.
When you book on Kulula with Discovery and are on Diamond status, you get 35% off the flight plus an additional 10% if you pay with your Discovery card. You can also use miles to offset the
balance of the flight. There have been many a time when I’ve had to pay a few cents on the credit card (free flight) as you can use miles in multiples of 10 only. 10 discovery miles is worth R1.00 with Kulula.
If you’d like to go international, Discovery miles can easily be converted to British Airways Avios or SAA Voyager miles on the Discovery site. Avios 1 to 1. Voyager 1.2 discovery miles per voyager mile. Also nice for upgrades.
*I really, really do.
There’s nothing Wolf of Wall Street about long-term wealth creation, especially for us index investors. You diligently put away what you can and wait for the market to do its thing. If you’re not fond of watching paint dry, you probably won’t get your kicks from this investment strategy.
It’s not surprising, therefore, than we often receive questions about alternative asset classes. If you’ve been bored out of your mind with your investment strategy, you are ready for some action. Like everyone else, I’d love to tell the story of the one investment decision that made me rich. It’s investment lore at its best.
In this podcast, Simon and I discuss the alternative asset classes we get asked about and why we never have a satisfying answer for thrill-seekers or artists.