How I practically intend to fund my retirement
Updated: Mar 20
The practicality of how people fund their living expenses after they are no longer working is not often expressed openly. Maybe this is due to the sad fact that many people can’t afford to take any form of a backward step in their income levels when they reach retirement age.
Most of the narrative around funding retirement is advertised by life insurance companies focusing on purchasing living/guaranteed annuities using your retirement fund products. They provide you with calculators which assume that your only means of retirement is what is saved in your retirement annuity or pension fund.
The reality is that transitioning away from full-time work (what I would like to call retirement), presents you with the opportunity to fund your living expenses using a mixture of income sources. This approach provides you with improved security since you are not just over-reliant on any one income source, and since different incomes are taxed in different ways, this approach also provides you with the opportunity to be more tax efficient with your income, so that you make every Rand count further.
I have been thinking about adding a section to my financial plan detailing how I plan to fund my expenses once I personally transition away from full time work. I think this is crucial step to ensuring that I meet these goals because I need to create alignment between these plans and how I am investing on a monthly basis.
Here is my plan:
1. Receive bi-annual lump sum payments from investment dividends (expenses funded +-40%)
My investment of choice in my tax-free savings account (TFSA) the “Satrix MSCI World ETF” pays dividends annually of around 1.5% of your total investment value. In today’s money, I would need around R8mil in this ETF investments to achieve dividends payments which meet 40% of my monthly expenses (this will be a moving target with inflation).
My strategy to reach this goal is to max-out my contributions to my TFSA account every year and invest into this ETF. This is my priority. Secondly to invest in the Vanguard Total World Stock Index Fund ETF in an offshore account. This is where the most work needs to be done as it also affects income source 5.
Note on tax: dividends are taxed by dividends withholding tax. In South Africa we pay a 20% dividend withholding tax on all dividends received. If dividends are received in a tax-free savings account, South African dividends withholding tax is not paid, however dividends received from international ETF’s will be subject to dividends withholding tax of 15%. Dividends are a favourable means of income because of these lower tax liabilities.
2. Receive monthly income from rental properties (expenses funded +-20%)
The luxury of rental property income is that you are likely to earn higher yields (7-10% on average) than dividend income (0.5-2% on average).
I currently own one apartment, with another on the way. The first was a development which I took occupation of in early 2016, the second is a development currently scheduled for completion in May 2023.
To reach my goal of funding 20% of my required income I need to have both bonds paid off.
Note on tax: rental income is taxed as income. This will be paid in accordance with the SARS income tax brackets. It is best to minimise this type of income as in South Africa the tax brackets are progressively higher the more money that you earn. These taxes can be significant as I am familiar with being a salary earning employee for most of my working life. Higher income from these sources also affect capital gains tax that I may pay and interest income I may earn.
3. Receive monthly income from a living annuity (expenses funded +-15%)
I don’t contribute much of my net income into retirement products such as pension funds or retirement annuities, but a part of my employment contract is that 11.15% of my gross income is invested into the company pension fund.
My strategy for further contributions into my retirement annuity is based on when the bonds of my apartments are paid off. I plan to offset the income tax payable from the rental income with retirement annuity contributions.
Note on tax: living annuity income is also taxed as income, this together with my rental property income and interest income (below) will determine the tax rate that I pay on my income.
4. Receive monthly interest income (expenses funded +-10%)
Another consistent type of monthly income can be received from interest. I currently have no interest income generating assets other than money in the bank, however we all know that money in a bank account is not a productive means to fund an income.
I will only pursue interest income assets 5-10 years per-transition.
The two methods which I will use to fund a monthly income is:
1. Vanguard Bond ETF’s – there are many corporate and government bond ETF’s available from Vanguard. Bonds provide you with capital return without the volatility of shares, as well as monthly distributions/income
2. Body Corporate Funding Solutions – BCFS’s facilitate loans to sectional title body corporates where you play the lender. This can provide you with yields of price +3% for the monthly income plan.
Note on tax: interest income forms part of your total taxable income. There is an annual exemption of R23 800, however this exemption hasn’t been increased in since as far back as I could find, and it doesn’t look likely that it is increased in future.
5. Sell down assets as required (expenses funded +-10% or as required monthly)
To gain this small chunk of income that is required, I plan to sell ETF’s from my offshore account and TFSA. This will be the last means to gain income and will only sell assets based on my monthly requirements.
If I am unable to meet the goal of dividends which can fund 40% of my income as a back-up plan I intent to increase the contribution of selling assets to fund my income.
Note on tax: in South Africa there is an exclusion of R40 000 per year on capital gains. Only 40% of the capital gain is added to your taxable income. As a result, this is a much more tax favourable means of income. I plan to make use of the R40 000 exclusion, but once again this is an allowance that is being eroded every year that the government does not increase the exclusion amount. ETF’s sold from my TFSA are not subject to capital gains tax.
6. Part time work (expenses funded +-5%)
Part of the luxury of having the income sources mentioned in points 1-5 is that I have a choice in this final income source. Personally, I couldn’t see myself not contributing further to society when the time comes to transition away from full-time work. I hope to always have some form of work that I am passionate about in my life, but passion is the key word here.