169 - Strategising how and where to invest efficiently

Question I will be retiring in 10 years’ time and am currently paying the maximum into my retirement savings. I have extra funds that I can invest. Would you recommend that I use these to pay off my bond or should I invest my funds elsewhere?

Answer I like to follow a structured approach when it comes to investing. There are certain things that you need to have in place before you make an investment.

Protect your income stream

Before you invest, the first thing that you need to do is to ensure that your source of income is assured should you not be able to do your job.  This is usually done through an income protector policy.

In the past this was not a major issue as most people worked for large companies who would pay you should you be unable to work. However as more and more people are working for themselves, they often do not have this cover and can suffer real financial hardship should something happen, and they are unable to work.  It is vital that you put this protection in place before you start investing.

Investments with tax concessions

Once this has been done, the first investment type that you need to look at all those which give you tax breaks. These would be your retirement savings.  Each year you are allowed to contribute up to 27.5% of your taxable income into a retirement investment and have this amount come off your taxable income.

This is a “use it or lose it” benefit so if you don't use it in that particular year, it will not roll over to the following year.  You will struggle to find an investment that will give you the kinds of returns that this does once you take the tax break into account.

Interest on debt

Now before you can start making other investments. you need to check the interest rate charged on any debt that you have.   Any investment you make must be likely to deliver a return that would be higher than the interest rate on any debt.  If not, then you should clear the debt first.

This brings us to your question.  How likely is it going to be that the returns on an investment will do better than what you are paying on your bond?

Now, had you asked me this question a year ago, the answer would have been easy.  Home loan interest rates were high and the expected returns on the stock market were not looking that good.  It would be a challenge to get low risk investment returns that would provide a higher return than that which you were paying on your bond.

However, things have changed since the election.  We are now in a situation where there is talk of interest rates being cut over the next couple of months.  The stock market is looking more positive and there is a good chance that you could end up getting a better after tax return from making investments than you would by reducing your home loan. The answer is no longer that obvious.

My recommendation is that you speak to your financial advisor and get a good idea as to what he or she expects the returns to be on a typical investment after tax and costs have been deducted.  You would then compare this rate with that which you're paying on your bond. If it is higher, then invest before you pay off your bond and if it is smaller, then channel the additional funds into your bond before you invest.

Alternatively, you could hedge your bets and put some funds into the bond and the rest into an investment. This may be the better option, while we are going through the current political and economic changes.

Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives.  You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za