Many South Africans favour property as a way to build long-term wealth and set themselves up for an income into retirement. Certainly, many have enjoyed solid returns in this way, as entrepreneur and former Miss South Africa Jo-Ann Strauss can attest.
In the podcast Pageant queen to property dream: Investing with a plan, Strauss shares how she managed to make smart investments just before the big property boom in Cape Town.
However Guy Chennells - the Product Head of Discovery Employee Benefits and an all-round retirement guru - cautions that property is not as simple as it sounds, and can be especially risky if you're using it as your only vehicle to save for retirement. As a property investor himself, he raises four points emerging from his hard-earned experience to consider if you're planning on property returns to fund your retirement:
What to consider before you make property your pension
- Property can become a second job. Managing tenants, maintenance, body corporate politics, tax returns, and so on can be stressful and very time-consuming. You could employ a managing agent, but you'll need to subtract that cost from your profit. Strauss also notes the importance of being physically on hand when managing property: "If you're too far away from your assets, you're not able to properly manage them."
- Property can be risky. You may have a terrible tenant who damages your property, or no tenant for a while if demand drops. The price of the property might drop so that you can't get your money back. Interest rates may rise so that your bond becomes more expensive. Levies and special levies may rise, eroding the investment case.
- Property can be expensive. Legal fees and duties in buying and selling property can be very large. The cost of maintenance, especially if big things go wrong, can also be a drain on your finances at an inopportune time.
- Property is illiquid and concentrated. 'Cashing out' on this investment is no quick or easy process, making it illiquid. Plus, most of us could only afford to buy one or a few small properties. That means you are highly exposed to one asset class, and in fact to one asset within that asset class. That could work out well for you, but it could also be a disaster.
3 perks of saving for retirement in a vehicle designed for it
Chennells then compares this route to investing in a retirement annuity (RA), explaining that a well-structured annuity is a great way to save for the long term. "Like property, RAs are also illiquid, because you can only access this money once you turn 55 years old. But retirement annuities offer other advantages because they are investment vehicles specially designed to encourage retirement savings." These perks include:
- Retirement annuities are far more tax-efficient. You can contribute to an RA before your income is taxed. This is a huge advantage, even before you have invested the money. You're only taxed on your retirement savings when you withdraw (once you retire), but until then, you have more money growing for you over time, thanks to the wonders of compound interest. Chennells stresses that it's a behavioural mistake to think that it's too late to start saving in a retirement-type vehicle. "At any stage in your savings journey, saving in a retirement annuity, or the pension or provident fund that your employer provides, is the only way to get the tax man to save alongside you."
- Retirement annuities are administratively far easier. You mostly just make the contributions, and can even set up a recurring debit order to automate regular saving. Then someone else does all the work to manage the investments and just sends you a neat tax certificate at the end of the year.
- Your investments can be more balanced. In an RA, you have to invest in a balanced portfolio of assets, so you are not overly exposed to one asset class (e.g. property). This diversifies your portfolio and lowers its concentration risk. So, while the money is illiquid in that you can't take it out before you turn 55, it is very liquid within the RA: it can be allocated to different managers and asset classes over time.
Why it's so important to save for retirement as efficiently as you can
Chennells explains that when people don't save enough, their families take a toll in the long term, and the cycle not only repeats but it exacerbates.
"Analysis from our Discovery Invest Technical Marketing teams has revealed that for every rand you don't save for retirement now, your children may have to pay up to R6.70 later, in real terms, to cover the financial shortfall. This is due to the impact of missing out on investment growth in the years leading to retirement. So, saving specifically for retirement as soon as you can is key in breaking the Sandwich Generation cycle."
For more on how planning and investing for your future can put you on the path to financial security, catch Strauss and Chennells in the Your Money Matters podcast series with business journalist Bruce Whitfield.
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