Appendix: Pre-Retirement Calculator - RA vs Normal Investment Accout
A reader asked me the following question:
"What additional % return is needed from my taxable investment portfolio to beat an RA pre-retirement?"
Contributions to an RA give you great annual tax benefits. Any contribution to an RA is tax deductible - up to an annual limit of 27.5% of your salary or R350k. (See part 1's interactive personalised tax table to see how much you can get back from SARS)
This is guaranteed money back from SARS. You would not be getting this tax back if you had instead invested in a normal taxable investment account.
But there are downsides to an RA. Most importantly, you can expect lesser investment returns in your RA compared to a normal taxable investment account due to pension fund regulation. (See part 1's for details)
In the guide, I assume that the RA will achieve a long-term real return (*) of 3% vs the normal investment account 4.5%. So an additional 1.5% is achieved in the normal investment account.
Now what happens if I am even more pessimistic about RAs. For example, lets assume my RA only achieves a 2% real return - due to government imposing prescribed assets within pension funds. How would an RA fare vs a normal investment account under this scenario? Or, lets assume another scenario. I have found investments - eg some awesome Private Equity fund - which will achieve a real return of 6% in my normal investment account.
How would an RA fare vs a normal investment account under these different scenario? The short answer is it depends on your salary, contribution - as this determines your potential tax benefits - & time horizon and your return assumptions for your RA and normal investment account.
Since each individual's salary, contribution & time to retirement is different, here is a personalised calculator to play around with.
This is the same calculator as in earlier chapters, however, I have made two additional variables available. You can change the long-term return assumption for an RA & taxable investment to see the effect on your investments!
RA vs normal taxable account during my pre-retirement years
10.0%
30 years
Additional Advanced Inputs
| RA | Taxable Investment | ||
|---|---|---|---|
| Year 1 | R60.8k | R37.8k | 60.8% |
| Year 5 | R322.9k | R206.9k | 56.0% |
| Year 10 | R697.2k | R464.8k | 50.0% |
| Year 15 | R1.1m | R786.2k | 43.9% |
| Year 20 | R1.6m | R1.2m | 37.7% |
| Year 25 | R2.2m | R1.7m | 31.5% |
| Year 30 | R2.9m | R2.3m | 25.4% |
Given a real return (*) assumption of 3% within my RA and a 4.5% in my taxable investment account, by the time I retire in 30 years, I would have a total amount of R2.9m in my RA. If all my contributions had been invested in a normal taxable investment account instead, the final balance would be R2.3m. (Remember from Part 2- to make a like for like comparison, for both scenarios I end up with the same monthly spending money)
So if an additional 1.5% return is achieved within the normal taxable investment portfolio, I would still end up with 25.4% less in 30 years due to the annual tax benefits of an RA.
(*) if future inflation is 6%, then a real return of 3% will be 9% in nominal terms. Thinking in real terms (or today's money terms is often easier)