BOITUMELO NTSOKO: Welcome to the Money Savvy Podcast. I’m Boitumelo Ntsoko. With interest rates rising many people are wondering whether to put all their extra funds into their bond or to invest them. Joining us on this episode to share her thoughts on the topic is Elke Brink, who is a wealth advisor at PSG Wealth. Welcome, Elke.
ELKE BRINK: Thank you. Thank you for having me,
BOITUMELO NTSOKO: Now, what should you consider before looking at putting extra funds into your bond?
ELKE BRINK: I think this is such a relevant topic, especially for younger people. I think investors in principle always have the mindset that they want to prioritise paying off debt or paying off a bond and first handle this sector of their life, if I can call it that, and then only start saving or investing. I think that’s a very important mind shift that needs to be made.
The ideal is eventually that you prioritise both. Eventually when you get to retirement or later in your life you [will] still need a fundamental portfolio that you can live off, so you need to be able to build up a portfolio that’s going to be able to replace your income one day.
If you prioritise paying off a bond for too many years in your life, and you’re not starting to invest and save, you’re just missing so much time to build up a portfolio that you’ll need one day when you retire.
If you prioritise paying off a bond for too many years in your life, and you’re not starting to invest and save, you’re just missing so much time to build up a portfolio that you’ll need one day when you retire.
So I would say it’s important from day one to prioritise both. Yes, you do need to pay off your bond, but to me, the priority is almost rather prioritising an investment portfolio because the value of time and compound interest is so much more valuable than losing maybe 10 or 20 years – or even more – by focusing on one thing.
BOITUMELO NTSOKO: And if you do decide to maybe focus on both, what would be the percentage split that you would advise?
ELKE BRINK: I think there are a few considerations that need to be taken into account. One of the main things is – and the answer will differ in different phases in the market – it’s important to see firstly what interest rate you are paying on your bond. This will be different, maybe, for different people at different phases, [such as] when you took out the loan or when you took out the bond. Together with that, what cycle are we at in the market? Are you earning high returns in the market, or are we in a lower return environment? Then we can change our priorities as the cycles change.
I think if we’re in a low interest-rate environment and you’re earning significant returns on an investment portfolio you’d definitely rather prioritise the investment portfolio. [But] if we are maybe in a higher interest-rate environment and a lower market-return space, that can be changed around.
I think if we’re in a low interest-rate environment and you’re earning significant returns on an investment portfolio you’d definitely rather prioritise the investment portfolio. [But] if we are maybe in a higher interest-rate environment and a lower market-return space, that can be changed around.
So I would definitely not see this as a stagnant type of decision. It’ll change according to market cycles.
But I think it’s important to find a good balance between ensuring you are saving sufficiently for retirement and ensuring you have an emergency fund in place. You don’t want to increase your levels of debt should there be an emergency, and rather have short-term cash available should you need something. And then together with that you can pay off the bond.
So I think it’s always good to go and sit and do an analysis – either yourself or, of course, it’s always recommended to sit with a professional advisor who can really make appropriate recommendations on how to split it, and how it’ll work in your portfolio.
BOITUMELO NTSOKO: Now, if you have an access bond, how does this scenario change?
ELKE BRINK: An access bond has a lot of benefits. There are benefits that you have, accessible funds. So basically it would be a type of bond you, for example, take out on a home loan and, as you put more funds into this type of investment, or this type of bond, you are essentially paying off the home. But the funds are accessible. If you have a short-term requirement for cash, you can take funds out of this access bond again. So it can be seen as a benefit for what I just mentioned – having short-term cash available should there be an emergency or should there be a requirement. I think it’s just important to keep the bigger picture in mind that you still are going to be having to build up a portfolio that you are going to live off one day.
It’s not recommended to live off an access bond. You’re going to need the diversification of different asset classes in your portfolio as well.
It’s not recommended to live off an access bond. You’re going to need the diversification of different asset classes in your portfolio as well.
I think it’s also important to just ensure what rates you’re paying, also taking an account that whatever type of bond you have in place, you are paying for it eventually. So ensure you know exactly what type of bond and what type of rates you have in place, and just keep that in mind when you are also building up your portfolio for yourself where you are saving and investing on a monthly basis.
BOITUMELO NTSOKO: If you have a rental property, would it be better to direct these funds to paying off the bond on it?
ELKE BRINK: Essentially the ideal place you want to get to one day, if we look at where we want to be, when we get to retirement at least, is you do want to be in a space where you don’t have any debt or you don’t have anything that still needs to be paid off. I think it can become quite a comprehensive topic if we look at property and talk about property and what role it plays in your portfolio.
But I think if you have an additional property that you’re renting out, in many cases, it becomes profitable only once your bond is paid off. I think in most cases normally the rental income is only supplementing some of the bond payoff you have – or not even replacing it in full. So I think you normally only really start making a profit once the bond is paid off.
So there are scenarios where you would want to prioritise it. But once again, I would be careful to [not] just prioritise this and maybe lose 20 years of building up a portfolio where you could have built up a significant investment portfolio that can assist you further in your life.
So the general rule of thumb – when it comes to planning for retirement, when building up a sufficient portfolio – is that you need to save between 15 and 20% of your income for your working lifetime, which is normally around 40 years, taking into account inflation and taking into account an average return of around 10%.
So the general rule of thumb – when it comes to planning for retirement, when building up a sufficient portfolio – is that you need to save between 15 and 20% of your income for your working lifetime, which is normally around 40 years, taking into account inflation and taking into account an average return of around 10%.
So there is a lot of commitment that is needed to build up a portfolio [so] that you will be able to replace your income at retirement. I think, unfortunately, and especially in South Africa, too many investors wait too long and save too little.
The reason why only around 6% of people can retire is that I think we just wait too long. We start saving only in our forties or even fifties. I think there are two mistakes then – we lose a lot of time and a lot of investors are saving too little. So, even if you’re earning a proper return in your portfolio, you’re not saving, percentage-wise, enough compared to what you are earning to be really able to have the correct replacement ratio in place that you can one day replace the income that you were earning before you retired.
BOITUMELO NTSOKO: Just then on the rental property tip – if I’m a pensioner and I’ve got a rental property and it’s paid off, would it be a good way to generate an income to supplement my living costs?
ELKE BRINK: I think an additional income is always beneficial, and it would depend [on] what your portfolio looks like. Do you only have the rental income that’s coming in, or do you also have an investment that you are living off? I think the ideal resilient investment portfolio would always consist of different asset classes, and by that, I mean equity exposure, cash exposure and bond exposure. Local and offshore exposure and property also fit in as an asset clause of their own. I think earning a rental income from a property carries its own risk. There are a lot of maintenance costs and things like levies and taxes that also need to be paid on a property. I think the income you earn is sometimes a little limited; it’s not as if you can increase your rental income that you’re asking by 10 or 12% every year. You can maybe increase by inflation – if as much – where the average return over the longer term on an equity portfolio, for example, can be 10%-plus.
So if you have a well-diversified portfolio, the percentage earnings that you can potentially earn can be much higher in a more diversified portfolio, including equity exposure, compared to just having rental income that’s maybe not even guaranteed.
So if you have a well-diversified portfolio, the percentage earnings that you can potentially earn can be much higher in a more diversified portfolio, including equity exposure, compared to just having rental income that’s maybe not even guaranteed.
Maybe there are a few months that you don’t have someone renting, or whatever may take place in terms of that. I think it’s just not a hundred-percent guaranteed income. So I would recommend you diversify – not just having the rental income, but having other asset classes in your portfolio as well.
BOITUMELO NTSOKO: Now, going back to paying off your bond versus investing, if I choose to go the investing route what’s the ideal financial position I should be in before doing so?
ELKE BRINK: I don’t think there’s ever an ideal financial position to be in. I think that’s the one important thing with investing – it’s better to just start somewhere than to wait for a moment. So many – and especially younger – people sometimes feel they don’t have so much to invest. Now they’re just not doing anything at all. Having the value of time and the value of compound interest, even just investing R100, will make a major difference over a 20-or 30-year term.
So my recommendation with investing would always be to start as early as you can, even if it’s really little. Don’t try to time the market.
So my recommendation with investing would always be to start as early as you can, even if it’s really little. Don’t try to time the market.
Especially in the space where we are now, for example, there’s a lot of uncertainty in the world – not just in South Africa, but globally. A lot of people hold back on investing, waiting for a better time or waiting for things to turn around. Before you see it, another three years have passed and you missed a few good days in the market, days that no one can predict. We never know when the positive days exactly will be, and we also don’t know when the negative days will be.
It’s essentially impossible to try to time the market, so it’s just about having ‘time in the market’, as they say. So I would just say start whenever you can, with what you can, and have the benefit of time
BOITUMELO NTSOKO: And which investments should you consider if you have, let’s say, adequate retirement funding and cover for life’s unexpected events?
ELKE BRINK: I think if you are already covered in that area, [if] you have all the appropriate risk cover in place, and [if] you [have] already ensured that you are fine for retirement, then I would supplement that. I would firstly be sure that I’m definitely one hundred percent comfortable for retirement. I think certain retirement types of product have certain tax benefits tied to them, which would be why a lot of people prioritise those products first.
But, together with that, I think you can start building up a portfolio that’s maybe more accessible, that can also be enjoyed at retirement for holidays and travelling, and maybe also be seen as an emergency fund. I think no one has ever complained of having [excess] funds at retirement. I would definitely recommend just building on that.
I think at the moment we can see the power of inflation again and, as life becomes more expensive, I would rather plan more conservatively and make provision for a life that becomes more expensive, [so as] to sustain the same standard of living. So rather save conservatively and invest more than perhaps you thought you would’ve needed – and ensure that you can sustain the lifestyle that you would like one day.
BOITUMELO NTSOKO: Thank you so much, Elke. That was Elke Brink, who is a wealth advisor at PSG Wealth.
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Simply, if you are paying more on your mortgage than the stock market is returning, then pay off the mortgage. It depends on the cycle. There are periods where your BEST investment is paying down the mortgage/s.
Some of us are older and remember around 1986 when equities tanked and prime was over 20%
While we have our situation where mortgage interest is not tax deductible, the bank debt is not ring-fenced on the house, investment income is taxable mostly, and fees are what they are unless you invest non-discretionary : put most of your extra into access bond. It is hard to beat that after tax and cost free return plus in a fully liquid investment. Just avoid the temptation to draw for stuff you shouldn’t be borrowing longterm on as drawing is exactly that.
Sit on the bond and wait for a crash. Then take access portion and invest 25%. Wait.
Just to throw the cat among the pigeons, or the spanner in the works maybe…How are we supposed to build wealth when the owner of the title deed has to service the bond with after-tax money, pay the redistributive rates and taxes on the property, pay insurance on it, pay the security company to protect it, renovate and paint it, pay the minimum wage for those who work there, and then pay CGT when we sell it and Estate Duties when we die? We actually borrowed ourselves into a tax liability.
The point is – we own the title deed of the property, but the government owns the revenue stream from that property. That implies that we are taking on debt to buy ourselves into slavery under a socialist government. Mugabe was stupid enough to confiscate the property outright. The ANC only confiscated the cash flow stream of the property, leaving us with the installments. This is the difference between communism and socialism.
Maybe we should go a step further and ask – if we are going to take on debt to buy assets, in which jurisdiction should we do it, and which asset class provides the best real returns relative to the interest paid?
What was the question again?
Makwe Masilela of Makwe Fund Managers looks at JSE and global markets not seeing any movement, economic growth slowing down in China, and the half-year results from Absa and Thungela.
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