The shocking reality of fees, working hard and retiring after 80
Note: this is an interactive MyMoneyTree © guide. Figures and wording change according to your personal inputs
An evil recipe might be spoiling your future retirement & how to fix it
Some of us want to retire earlier. Maybe at 60, 55 or even 50. Travel the world whilst still young. Live an active, outdoor life. Not be bogged down in corporate meetings. And instead enjoy what life has to give.
But then there are those who do the right things and yet unknowingly add a number of years to their working lives. This article is for them. Oh, they might not even know they are on this path. They are on it unknowingly. Unwillingly. They are on this path despite doing all the right things. "They" might just be "you"!
If you find you are this person in this story, then consider it a light which has just revealed a dark, ugly place in your financial journey. Once uncovered, you will be able to deal with it. And I will show you how to deal with it in three simple steps.
Is this you?
You are young and employed. You got the degree. You landed the job.
You do not live beyond your means. You spend less than you earn. You save the difference.
You invest for your retirement. Every month, you put away a respectful amount of your salary (around 10%) into your employer's pension fund.
You also invest an additional smaller amount in a retirement annuity. Knowing a 10% contribution is not sufficient for retirement, you contribute additional savings towards a retirement annuity (RA).
Yet, despite doing the right things & being a good person, you will still only be able to retire after 80! How is this possible?
The most common culprit are admin & other fees 😈
Have you ever seen this on your investment statement?
Administration fee: 0.35% p.a. on your assets. However, a minimum fee of R121 p.m is charged per contract and a maximum of R605 p.m across all contracts.
You probably have not seen this. It is the fine print. Who really reads the fine print? We all know we should, but none of us really do. Even if you actually did read it, then a 0.35% pa admin fee sounds more than reasonable. This is an example of an Old Mutual contract. But other old school stables, such as Sanlam, Liberty, will look similar.
Now here comes the big curve ball. You see a 0.35% pa fee is only achieved once your contract value exceeds +/- R 400 000. If you are contributing less than R 1000 per month to this investment, a R121 per month in admin fees will seriously dent your retirement prospects.
Some examples. The R 121 per month is just one example. It is a real life example sent through by one of the MyMoneyTree readers. I have reviewed numerous EAC statements recently. There are some real shockers. And most of them are with Old Mutual 😈, Sanlam 😈 or Liberty 😈. The axis of evil.
Now, your admin fees may look slightly different. An easy way of checking is requesting an EAC statement from your provider. The EAC table will look similar to the below.
An example of an EAC statement #1.
Here is another one #2
The 1, 3 and 5 year number include early termination fees & other nonsense such as initiation and commission fees.
So the number to concentrate on is the 'Maturity' number. In the above example a 2.8% admin fee applies. 2.8% in admin fees is simply crazy & should be made illegal 😈!
But Admin fees are not the only culprit.
Whilst admin fees are the most common culprit, the most important number on your EAC statement is the total EAC number. That is, the total fees you will be paying. In the above example #2, that is 3.3%. This is way too high. Lets find out just how big of an effect this has on your retirement.
Effect of fees on your retirement
If your total EAC is anywhere above 1.7%, you are paying too much in fees! Whilst admin fees are often the main culprit, if your total EAC is anywhere above 1.7%, you can do better! To understand what kind of effect this can have on your retirement, consider how much better you will be if you switch to a solution with more reasonable fees. (You should be looking at a total EAC of +/- 1.1% or lower)
How a 3.3% fee can cost you R709k in Retirement Savings and mean the difference between retiring at age 65 vs 80
| R 50.0k | |
| R 500.0 | |
| 3.3% | |
| 1.1% |
Assuming a conservative 7% market return, a 2.2% fee saving will give you 38.1% more over twenty years. And a rodonculous 91.3% more if invested for 40 years. That is a saving of R708.7k due to fees.
| Years | Future Market Values | |||
|---|---|---|---|---|
| 3.3% fee | 1.1% fee | Difference due to fees | ||
| 5 years | R 94.1k | R 103.5k | + 9.9% | |
| 10 years | R 147.0k | R 174.7k | + 18.8% | 😄 |
| 15 years | R 210.5k | R 269.6k | + 28.1% | 😄 |
| 20 years | R 286.6k | R 395.9k | + 38.1% | 😄 |
| 30 years | R 487.3k | R 788.4k | + 61.8% | 😄 |
| 40 years | R 775.9k | R 1.5m | + 91.3% | 😵 |
How much longer will you need to work?
If your EAC fees are 3.3 % & your retirement is 40 years away, it will take an additional 15 years of working hard & contributing R500.0 per month to catch up to the same value ( 1.5m) had you invested in a Retirement Fund charging 1.1% . That means, it could be the difference between retiring at age 65 vs retiring after 80 !It is somewhat less the closer you are to retirement. If your retirement is 30 years away, it will take an additional 10 working years. And if your retirement is a mere 20 years away, then it will take an additional 5 working years to reach the same retirement funds had you invested in a Retirement Fund charging 1.1%.
Conclusion
Fees are one of the most important factors to take into account when investing for retirement. Due to the compounding effect, fees can make a difference between you retiring at your desired age vs working additional years. And you have to be ruthless in this area. If you are being charged too much, then SWITCH! 10x, Sygnia, Outvest, EasyEquities have seen this evil fee gap & are bringing costs way down for consumers. There has never been a greater focus on fees, which historically have been hidden, complex and simply too high. These new incumbents are changing that.Here are some actionable steps for you.
- - Firstly. Request an EAC statement from your provider.
- - Secondly. If your total EAC is anywhere above 1.5%, consider switching to a provider with less excessive fees. Here is a list of low-cost RAs in South Africa
- - Find out what charges will apply for quitting your current RA. I recommend contacting e.g. 10x, which will look at your current contract to understand whether it makes sense to switch.
You can always contact me at admin@mymoneytree.co.za, if you have any additional personal questions or use the Forum below.
If you need to pay excessive penalties for moving your RA, read Should I move my RA if moving entails huge penalties?.
Related Reading
- Which is the cheapest RA in South Africa?- How much should I contribute to my RA?