Not many of us are well-equipped to manage a large sum of money. Our monkey brains spent so much time learning how to run away from predators and exactly zero time learning about financial decision-making. We don’t blame it, of course. Compounding is lost on the dead.
All this monkey business makes retirement a nightmare. Most of us learn to cope with money one pay cheque at a time, and even then we often do a bad job of it. Over time a monthly income starts to feel manageable.
Once the corporate machine spits us out, often in our 60s, we are suddenly expected to understand drawdown rates and how a living annuity differs from a guaranteed annuity. We have to make sense of the tax code - a seemingly impossible task. The behavioural aspects of financial management we avoided thus far suddenly become the key to our survival. All this while we profoundly change our daily routine and often our living arrangements.
Since managing our money in retirement or financial independence (whichever comes first) will involve the most important financial decisions of our lives, we should be preparing for those choices from the day we start saving.
This episode of The Fat Wallet Show is dedicated to that enormous amount of money we have to manage in independence. We talk drawdown rates, what happens when you become too old or too sick to make good choices, what to do when you only have a few years left to prepare and how to think about annuity options.
Johan
I’m nearing 65, which means need to retire now and are clueless as to where to from here.
I mostly saved and invested in single stocks. Lately, as you advocate every day, in ETFs.
But how does one do it from here? I’m comfortable with the 4% rule and relatively sure with a 5% inflation increase per year that my money will last into my 100s.
I am, however, not sure how to actually do it. I think one will sell enough equities at retirement for maybe two years’ income and stuff it in a savings account and draw monthly from there and replenish it thereafter on a yearly basis.
My concern is that at this age one tends to be out of action every now and then (e.g. in hospital with pipes and wires coming from all parts of your body) for a few weeks and then you are incapable to do or think at all.
Technology also starts to run away from you, you are not that quick anymore to master a new mobile phone/windows/ trading platform/ etc. and you cannot hear the call centre operator at SARS/bank/etc. anymore. You get the picture?
On the other hand I have been milked by many a financial advisor in my younger days and do not trust them and wish to steer clear of them.
Any idea how one can continue to bypass financial advisors but cater for ones diminishing abilities in this regards?
Syd
My wife and I will be getting at least 90% of our post-retirement income from a guaranteed annuity and plan to supplement this with income from investing in Income Funds.
We bought the Income Funds with the tax-free lump sums both me and the wife could take from our retirement funds as well as excess contributions to retirement funding. Those will be invested in my wife's name.
Income form the Income funds are mostly interest income, which will not be enough to make her tax liable. Part of the income proceeds on a monthly basis will then be used to continue contributing to our TFSAs until they are maxed (about 80 years of age).
In this way I am channelling money whose investment returns would have been potentially taxable into investments in our TFSA's with zero tax implications!
AJ and SM
I'm the unemployed female partner (61-year-old couple) with ZERO retirement savings. Hubby works in the Middle East. We've managed to save all the SHOCKING parent visa fees needed for a move to Aus, with no guarantee they'll grant the visa. (Our daughter and grandkids are there ... that's the pull.)
Hubby is more or less assured of another 12 months on contract. We now have US$ X amount monthly we can do something with. What is best to do? What is the index? Where does one find a 'fee-friendly' broker for investing in Ireland, for example?
Also, we have no assets, no policies, but I have just discovered that I have a retirement policy that I had forgotten about. It's paid up and has +-R20,000 lying in a Sanlam acc till I'm 65. How I can I best utilise that money?
We have an adult autistic child that lives with us. A nightmare scenario for the day hubby doesn't have a job anymore. We need to save intelligently for the next 12 months and we are ignorant on money matters. Totally ignorant!
Win of the week: Carl
I finally paid off my student loan!
I now have an "extra" R10 000 per month that I can either use for my vehicle debt or put into my savings.
I already max out my TFSA and contribute to an RA. My company provides me with a vehicle allowance each month which covers more than the monthly installment as well as insurance.
For the age old question: is it better to put this "extra" money into the vehicle to pay it off as soon as possible? Or is it a better idea to put that money away? Does the fact that I get a vehicle allowance make any difference?
Deborah
I want to invest in my first TFSA ETF. I am 40 and am playing a bit of a catch-up game so I would like it to be aggressive. Please can you recommend an ETF and who to buy it through? I also see you have One Lap ETF - is that an option?
Sabata
It helps to negotiate and / or fight with your insurer.
Dialdirect tried to increase my car & household insurance premium from R 1163 to R 1458 per month; a 25% increase.
I thought this was rather excessive and shared this view with my insurer. My premium will now be REDUCED to R 1099. I feel rather smug.
John-Ross
Are there any compounding benefits to having one ETF, as opposed to 2/3 ETFs?
Gregg
You mentioned your friend that managed to feed herself and two children on R1,000 a month. I am all for cost cutting, and would like you to please ask your friend firstly, how old are her two kids, and secondly, what type of meal plan does she implement at such a low grocery bill?
I would love to know how I can economise on food because prices keep on going up.
What are your reasons for using Easy Equities as a broker for your TFSA?
I am also researching where to place my TFSA. I know you have also mentioned ETFSA before who also appear to have low fees.
Can you give me some pointers here because I know you are a great one for not wanting to give any of your hard-earned cash away, especially on fees.
Rudolph
How does investing in gold, "fail" to produce "income"?
Adri
Patrick mentioned the Vanguard FTSE All-World ETF. He said that he is buying through his brokerage account.
Is there a South African platform with US account through which you could buy this ETF?
I see that Easy equities only has the Vanguard FTSE emerging markets available. Can you suggest a platform through which one can buy the Vanguard FTSE All world that is not too expensive?
Christina
I paid off the last of my debt in 2014, increased my monthly debit order to my savings account and wandered off to pay attention to things I find more interesting.
After about four years, I realised that my "emergency fund" was getting rather bloated and I should probably start investing some of the money. I went about this in exactly the wrong way. I invested about R 400 000 through Sanlam, set up a monthly debit order and called it done.
All of this was around June of 2018. Then I started listening to your show in April this year and I realized that I had been lazy and I that I was probably paying for it. I went through all my statements.
Not only was all the funds in my investment actively managed, I was also paying about 1.6% in fees on top of the fees for each fund. I have shut down the account and gotten my money out (minus about R9,000, which is probably a reasonable stupidity/laziness tax).
I have set up an account with a broker and invested about R50,000 of the money I got out from Sanlam (and another R150,000 from the still slightly bloated emergency fund).
However, it looks like we might be at the top of the market and that investing the rest of the lump sum right now would be a bad idea. Part of me is saying: just put the money in the market, set up a monthly debit order and call it done.
But I can't help but feel I am being lazy again. Is it a better idea to actually pay attention to the market for a few months and wait for prices to drop a bit before investing (given that the S&P 500 is at record highs and everyone appears to be piling in) or is it actually okay to just buy more of my chosen ETFs and assume that things will work out more or less equal in the long run?
Catherine
I am selling my property with the intent to rent instead
I own my property outright, which means I will be getting a huge lump sum (of about R1.6m), probably at the end of this year.
I guess I would like to spread across my ZAR and USD accounts in global equity ETFs like MSCI World and Vanguard World.
This is the majority of my net worth, and I’m unlikely to ever again deal with such a lump sum. What if the market crashes the day after I invest it??
Isn't there generally a global crash approximately every 10 years, and wasn't the last one 11 years ago?
Please can Simon look in his crystal ball and tell me when the next crash will be.
Tshedza
I have just noticed that since I decided to track my expenses, I analyse too much what I spend on and what value I get in return.
For example; the R3.50 cost of a plastic bag at Evergreen in Tshwane Market (I now request an empty box or just put everything back in the shopping trolley and pack them nicely in the car boot).
In June R600 bought me 329 kwh of prepaid electricity and this month the same amount got me 255.50 kwh. This change was brought by the start of the new financial year for municipalities and this appears to be what R600 will buy me going forward. Plus my bank charges me R1.50 to buy electricity on their app.
All these are things I would have easily ignored during my autopilot days, but not anymore. Am I just being too analytical or am on the right track?
Bonds are wonderful, magical things, but they can be tricky. Pool them all together into an ETF, and it gets even more complex. First of all, the tax on a bond ETF is tough to figure out. Coupons are taxed at your marginal rate, after an exemption.
When your coupons are reinvested, as in the case with our total return bond ETFs, do you also pay capital gains? The answer is surely no, but when SARS comes knocking for an audit, would you be able to strip out the coupons reinvested for the period?
What about inflation-linked bonds, where your capital amount increases by inflation with a coupon on top? You’d pay capital gains on the inflation-adjustment and income tax on the coupon. Will you be able to show which is which for the period?
I love thinking about bonds and bond ETFs. On the one hand, they’re incredibly simple, but once you start thinking about the tax implications, the simplicity leaves the building.
This week, we approach bond ETFs from two angles. As a short-term investment vehicle, bonds make a lot of sense. However, once you start delving into the tax aspect, a bond ETF seems less appealing than an ordinary government retail bond.
The role of bonds in a retirement portfolio automatically limits you to bond ETFs, but why are the inflation-linked bond ETFs underperforming the all-bond index?
Victor
I am required to travel to Mozambique and Zambia for work.
I require a car that would be able to get me there and back reliably. I currently drive a 1992 Nissan Sentra which breaks down about once every few months.
Luckily my father lives nearby and he can frequently provide me with assistance (this would not be the case when travelling for work).
I was looking at a second-hand Honda Jazz as they seem to be reliable and provide a good fuel efficiency. The current cost of this car is about R150k. Ideally I would like to buy this car cash in about three years.
I have received an offer of 13k for my car. I think it would be best to sell this car and invest the money, then use my partner's slightly more reliable 2004 Ford Fiesta in the interim (she lives close to work and does not use her car very often - also she is aware of this arrangement, i.e. I won't be stealing her car).
Considering my budget and still contributing to my TFSA, I estimate that I would be able to contribute about 3.5k per month to savings for the car (increased annually by 15-20%). Taking into account inflation of an assumed 5% p.a., and low average market return of 1% above inflation, I should be able to achieve my goal within the specified time frame.
My question however pertains to the best investment vehicle for short-term investments. I have looked at cash/cash-equivalent, income investments, money-market, and bonds.
Firstly, understanding the difference between the first three is fucking difficult. Bonds I kind of get and I agree with you, they are cool to think about. Should I invest all of my money (13k lump sum + monthly contributions in the same investment vehicle? Or should the lumpsum be in a different place, say fixed deposit or a notice account or one of these weird products which banks offer? While the monthly contributions go elsewhere like a bond ETF or into the NewFunds TRACI or perhaps even a combination of the two?)
Furthermore, I consulted your guide to bond ETFs. I prefer the bond ETFs which reinvest your money, so I would have to choose between NFILBI and STXILB. Satrix have a lower TER and most of their bonds are long term thus providing better rates. Therefore, I believe STXILB is the better product? In terms of cash investments I like products which I can access through my broker (such as TRACI) rather than my bank.
Please assist me as I am very confused about which investment strategy would provide me with the best returns. Does my investment horizon allow me to look into bonds? Or should I only be looking at cash/income/money-market things?
Win of the week: Cindy
What have you done to me? I have turned into that obnoxious person telling people to keep their cost of living low and to invest in ETFs. And I blame the Fat Wallet. :)
I wrote to you a little while ago with plans of tackling my debt like a rugby player after some much needed Fat-Wallet-encouragement. Since then, I have paid off my debt but got back into debt thanks to a shitty emergency fund. Now, I am hella close to paying it off again with the backing of a pretty sexy emergency fund.
Fat Wallet and Just One Lap have been educational, motivational and just damn inspiring. I am so ridiculously into personal finance that I am on a serious mission to change my work environment to the financial sector. As a graphic designer I want my job to fit my values - to design in order to educate people about their finances and not to design to make people buy more crap.
Chris
I'm currently doing an ETF based retirement annuity on the Sygnia platform using the following split:
Local Equity - Coreshares Top50 - 45%
International Equity - Satrix MSCI World - 25%
Local Property - Satrix Property - 15%
Bonds - Satrix ILBI - 15%
Cash - 0%
I'm unsure if I have chosen the correct bond ETF to complete my Reg 28 compliance.
Initially I thought an inflation linked bond would return inflation + 2%, however looking at the historical performance, inflation linked bonds seem to have underperformed inflation over the last 5 years (ILBI index returned 4.37% from 2014-2019). In contrast, the GOVI index has returned 8.18% over the same period.
How can there be such a huge discrepancy between the two indices, particularly as one of them is linked to inflation and should therefore be returning greater than inflation?
I still have 20 years to retirement so my goal is to set my RA up as aggressively as possible - I.E. I don't mind short term fluctuations. Do you think the GOVI or the ILBI is the more aggressive fund (hopefully returning better long term returns)?
Willem
My basic fee sits at 1%, but then they add a performance fee clause which is pretty unclear.
I’ve looked at the other options. The only passive investment which I can select is the Satrix Enhanced Balanced tracker with a flat fee of 0.36%, which sounds much better. Do you have any comments on this ETF?
I’d like to make this change, but I just feel that I don’t really have much of a choice with regards to passive funds.
Ashley
I am looking for the lowest cost provider to put together a bespoke share portfolio (chosen by me) in a retirement wrapper, for part of my retirement investments. PSG offer the service but it requires that you appoint a PSG advisor at an additional cost of 1,15% per annum. You’ve made me allergic to fees that don’t add the required value. I’m quite happy to pay handsomely for the professional services rendered but am battling to rationalise a fee based on a % of assets under management – especially given the size of the underlying portfolio.
I don’t drive a particularly fancy car, but the fee I will end up paying to the advisor would allow me to pay off two more similar cars. I’m looking to invest – without having to buy the investment manager two cars that could be mine.
I understand that you may be reticent to recommend a particular provider – but could you guide me in my search by suggesting a couple of places where to start.
Brenda
I have just turned 60 and have unfortunately made many disastrous money decisions in the past.
I have only been permanently employed, and contributing to a pension fund, for the past five years.
Needless to say, the thought of retirement (age 65) fills me dread and until now I have just stuck my head in the sand and tried not to think about it.
I have two properties (both currently with big bonds) but on retirement the proceeds from selling one will pay off the bond on the other, so I will have a paid up house and a roof over my head.
With only a few years to go, what is the best way of investing if one doesn’t have the benefit of time in the market? RA? or TFSA?
I am contributing a total of 20.5% of my current salary into my pension fund (company contribution and mine together).
Matthew
My parents have asked me if it is a good idea to put a some portion of their investment portfolio in the DCX10 index. They are not computer literate so I recommended they just stick to ETFs as crypto currency is more complicated to trade, hold, and a great way to lose your investment if you do not know what you are doing.
Having access to crypto though this index takes out the complications above. So is it an option or is it too good to be true?
Can I view this index as an ETF? By that I imply,
Self healing and removing bad performing currencies.
Gives diversification and a weighting based on some predetermined method[1].
Tokens are generated or issued like ETFs.
Are you protected in some way? (e.g. Trade insurance, compliance as an a financial service provider, etc.) Can DCX10 be trusted to some degree?
Taking past experience into account, will the token still be around even if the crypto market retraces? Remember that the previous BTC retrace in 2018 was over 80%from all time high and subsequently majority of altcoins retraced over 90% from all time high. Can DCX10 cancel the token due to bad performance?
Chris
I have a share portfolio of R1m . I also have a Unit trust portfolio of R1.5m from which I live.
I am considering investing in a foreign ETF. Will probably start off with R1,000.
Any suggestions?
For two years we’ve had to live with the shame of the Listener Love Index. The wisdom of the crowd is not quite so wise when it comes to stock selection. Let that be a lesson next time a friend offers a hot stock tip.
This week we finally replace that horror show with our new index - the Fat Wallet Price-Weighted Index (FWPWI). The methodology is one step dumber than that of indices weighted by market capitalisation. Market-cap indices multiply the number of shares in issue by the share price. We ignore the shares in issue and focus on nothing but the price. You’ll find JSE-listed companies within the R80 to R250 price range at the start date.
I’m curious about how this index will fare against our benchmark, the Satrix 40. In essence we’ve stripped the outliers - at the top we’re talking Naspers and a bunch of commodity stocks. At the bottom, property.
We end up with a fairly defensive index. You’ll find a number of consumer staples and retailers - those businesses we can’t do without during tough times. The index is heavy banks, which could turn out to be disastrous if that dreaded downgrade finally comes. Here’s hoping Dario is right about that.
Here is a video of how we put together the index. In the podcast we discuss why understanding this matters to beginner investors (and everybody else). The coolest part about this index is that you can easily replicate it for your portfolio. You simply add the average price you paid for your holdings and divide by your number of holdings. That will give you a DIY bird’s eye view of your overall wealth.
Steyn
I’ve started to realise that property might not be a very good investment. As I understand it, there are two factors that make a property a poor investment:
I ran the numbers and it became clear that the CGT you will pay after 20 years almost strips your growth entirely.
If you buy a property for R1m and it grows at 7% per year, it will be worth R3.95m after 20 years.
In today’s money it would be worth R1.23m. So in real terms, your property only grew by R230,000.
If you want to sell it, CGT will be calculated on the total growth of the property and not the inflation adjusted value. CGT will therefore amount to R210 000. After 20 years you only made R20,000 profit. This is sad.
This has not been the case with our two properties. We’ve been very fortunate with both of them:
We bought a rental property in a new development three years ago.
They only finished and transferred last year October.
Over the past three years, the property has grown tremendously and in the meanwhile new phases were added which made the development quite sought-after.
The developer kept some units in our block and is now selling them for R1.5m. If I can sell it now I will make a nice profit, but I can’t since there’s a clause that restricts me from selling before five years unless I’m willing to pay a penalty. This is to keep speculators from tanking the prices.
We also bought another house which is our primary residence at about R400,000 under market value.
Lastly, I’d like to share a property hack:
I have a 55 day interest free period on my credit card. So each month I put my whole salary minus debit orders in our bond.
For the next 55 days we live off the credit card’s interest free period. We clear the credit card after this period and restart this cycle. If we continue to do this over the next 20 years, we will save about R260 000 in interest and take 18 months off the term without using any of our own money.
Dario
SP has kept our credit rating below investment grade....for now.
I can't say I agree with Ramaphosa in all things, but I do recognise that he has the potential to steer this country into a better direction.
I am a firm believer that he will at least get SP & Fitch to upgrade us up to investment grade.
I think we have some time to prepare for this. I don't think 2019 is the turning point just yet. How do we best position ourselves and how much upside is there?
I currently hold some STX40 in my TFSA but I think investment grade affects bonds the most considering our JSE is largely offshore?
Gregg
You have my school-going son investing R300 a month of his pocket money into a Global ETF – how’s that for awesomeness! I’d much rather he do that than blow his money on what typical teenagers get up to now a days. Well done guys!
If I buy a house worth R1.5m, but I take out an access bond for R2m, it means I have automatically created an emergency fund of R500K. I don’t pay interest on what I don’t utilise, so I would only be paying interest on what I spent, in this case the R1.5m.
I totally get it that this is not the same, nor as good as buying a house for R1.5m, then putting R500,000 into the bond thus reducing it to R1m, but still being able to access that R500,000, all the while it is “saving” me interest. This is ideal.
But in the first instance, if one does not have a big enough emergency fund, is this not a good way to kick-start one?
Rudolph wants to know if raising taxes does the same thing to the market as raising interest rates does in terms of inflation, economic growth, investments, corporate profits, government revenues, etc?
Ben wants to know if it’s dumb to sell his old EW40s for ASHEQs in a TFSA.
Making mistakes is a great way to learn. Someone can explain diversification a hundred times without ever having the same impact as one share dragging down your entire portfolio. At Just One Lap, we like mistakes almost as much as we like questions. We know - mostly from experience - each mistake gets you closer to that ideal portfolio.
In this week’s episode, we use Ntombe’s question as a kick-off point for some of the common mistakes we all make when we start investing. We talk about the tendency to be too diversified when we start out. We discuss why starting your investment journey outside a tax-free savings account is really not a good idea. Here are some other common mistakes we discuss:
If any of these apply to you, don’t miss this one.
Win of the week: Ntombe
I opened a brokerage account last year. I didn't know much so my thinking was a "learn as you go".
I bought shares that were very cheap, testing waters.
Balwin Prop, Vukile, Delta, PnP, Old mutual and Satrix Top40.
Out of all of them Satrix is doing well. The rest are always in the negative. So I'm thinking of selling even if I lose and just buy more on Satrix T40 and Prop and other ETFs maybe TFSA. What will you advise me to do and which one are good? I don't have much so I use my salary and currently able spend about R200 pm buying on my EE, which is a start for me.
I was just shooting in the dark. Did not know what I was doing, it was a learning curve. I'm still learning but I'm getting there slowly. They were very cheap, also because I've seen these names and thought they kind of big companies.
Brecht
I have a savings bank account in Germany with some Euros in. The interest rate on this account is less than 1%. Would it be worth my while to move this to a broker where I could invest this money into ETFs in Germany? How does the tax implication work on this?
Nadia
You mentioned that Robert Kiyosake's advice on buying gold isn't such a great idea. I'm not very clued up about gold and I was wondering if you have done a podcast I could maybe listen to about why you think buying gold isn't such a good idea? My mom knows a lady who also firmly believes that gold is the way to go and I'd love to hear your view.
Wim
I invested in a cow about 9 months ago and paid R8,500.
To my surprise last month I received mail saying my cow, Silly, was on its way to the slaughterhouse.
I was paid about R9,600 after all the deductions, feeding, entertainment etc.
It was about 8% return on investment in less than a year. I felt chuffed, but haven’t decided to repeat since cost increased considerably.
I have a bond with remaining debt of about R500,000. My wife and I contribute more than double the repayment required. We have RAs. Should we rather push our extra savings currently going into our tax-free saving, RA or into the bond or continue with R2,750 into the tax free/RA?
I would also like to know if it is possible to choose a south African stock at the end of your show or once a month that prove a good investment opportunity. I do realize ETFs remain the primary equity vehicle for investment.
Waldi
What do you guys think is the best type of investment for him seeing as he is close to retirement age? Should he just put the money into a savings account and let the interest run on that amount? Is there still time for investing in ETFs? Or should he look at other things like Property (Maybe to rent out as an AIRbnb) or offshore accounts?
Joyfully Prosperous
I've inherited some RDF (Redefine Properties Ltd) shares and noticed that the analyst consensus on Sharenet is to sell them at the current price levels. These levels are in line with the lowest in the last 5 year period. So, what am I missing? Why do 86% of the analysts agree that they should be sold. Can these analyst opinions be trusted in general?