In the previous post, I mentioned money market accounts, which are either bank money market accounts or unit trust money market funds with current returns of roughly 4.4 percent and no fixed term. These funds or accounts are connected to the repo rate and track the repo rate’s upward and downward swings. Bank money market accounts offer a variable rate of return based on the amount invested, but unit trust-based money market funds offer a fixed unit price regardless of the amount deposited.
Fixed deposits were left out because their yields vary greatly depending on the term and the institution.
Cash, in any form, is not a good long-term investment, especially if you are under 65, because interest generated is taxed.
The only time cash in the form of a money market or fixed deposit account makes sense is if the investor is tax-exempt or if the funds are being saved for a purchase within the next two years.
Interest-bearing investments can be justified when money are invested in a special trust for a minor child, a special needs individual, or an NGO because these structures are tax-free. In the trust deeds of such vehicles, these types of investments are frequently designated as the prescribed investment of choice.
You enter the ‘growth’ space of the financial environment whenever you contemplate investment periods of longer than five years.
A 35-year-old with more than 20 years till retirement should, in my opinion, concentrate on high-growth assets such as shares and commercial real estate, as well as a healthy offshore exposure.
Retail bonds are a wonderful option for retirees who want income and are eligible for additional tax benefits. Retail bonds are taxed in the same way as cash and fixed deposits are taxed. Under the current circumstances, I would be hesitant to invest in a fixed five-year retail bond. The repo rate was recently hiked by 0.25 percent and is expected to continue to rise in the near future, making the 8% retail bond unappealing.
Depending on inflation, interest rates could easily approach and surpass a prime rate of 10% in the following two to three years. The inflation linker puts you ahead of inflation, but depending on your tax rate, the margin shrinks. If your tax rate is 30%, the yield on an inflation plus 4% retail bond drops to 6.3 percent in total if inflation is 5% (5 percent + 4% = 9 percent – 30% tax rate = 6.3 percent).
A 10-year retail bond with an interest rate of 8% is the same. If you are taxed at 30%, your return will be cut to 5.6 percent. The only difference is that you’re now locked in for ten years at a time when interest rates are expected to rise to normal levels. Remember that before Covid, the typical money market rate was around 10% per year.
When you’re retired, retail bonds make sense. Because they are backed by the government, they are a secure investment with a reasonable return (tax depending). However, I would not recommend investing in retail bonds as a means of securing future retirement income.
Given your age and depending on your investment horizon, you should aim for returns above inflation + 6% net (after-tax) as a retirement provisioning investment objective. After taxes, no cash or interest-bearing investment will provide that consistently.
If you’re a growth fund skeptic, consider income funds and low-equity multi-asset funds. Consider why it is so crucial to have a healthy proportion of exposure to growing assets locally and offshore while investing for retirement in the essay ‘Investments: Beware of the Cost of Conservatism’ that you referred to.
The lower your rate of return, the more money you’ll need to save to reach your retirement objective.
For instance, if you require R125 000 a month in 25 years (the equivalent of around R37 000 now with 5% inflation), you will require approximately R37 million. Assuming you have R1.5 million (the aim you should have at age 35 if you earn R37 000 per month and want to retire at age 60) so far and plan to retire at 60, you will need to make the following monthly contribution to attain your goal:
- Future value of current provision at 8% return = R10.2 million (shortfall = R26.8 million)
- Future value of current provision at 12% return = R25.5 million (shortfall = R11.5 million)
The numbers are self-evident. However, don’t be alarmed by the numbers. In actuality, you’ll start little and gradually increase your payments as your income rises. I just used a level contribution calculation to emphasize the need of decent returns and the consequences of being overly conservative.
What are retail savings bonds, and how do they work?
An RSA Retail Savings Bond is a government of South Africa investment that pays fixed or inflation-linked interest over a certain period of time. RSA Retail Savings Bonds are offered in the following forms:
- The Fixed Rate Retail Savings Bond series includes bonds with periods of two, three, and five years. Fixed Rate Retail Savings Bonds pay a market-related fixed interest rate on interest payment dates until the bond matures. Each of the maturities in the series has a different interest rate.
- The Inflation Linked Retail Savings Bond series includes bonds with maturities of three years, five years, and ten years. The principal invested in Inflation Linked Retail Savings Bonds is adjusted for inflation over the period, and a floating interest rate is paid every six months on interest payment dates.
The minimum investment amount is R1,000.00, while the maximum investment amount is R5 million.
- Directly at the National Treasury, 240 Madiba Street, Pretoria, on the corner of Thabo Sehume and Madiba Streets.
In South Africa, how do I purchase retail bonds?
Answer: You can purchase an RSA Retail Bond in one of two ways: online at www.rsaretailbonds.gov.za; or by mailing an Application Form to the National Treasury at “The Head, Asset and Liability Management Division, The National Treasury, Private Bag x115, Pretoria.”
What do retail bonds entail?
An RSA Retail Bond is a fixed-interest investment with the South African government that pays a fixed rate of interest for the duration of the bond. It has a guaranteed rate of return, may be purchased for as low as R1 000, and has no commission, agency, or service fees.
1. Retail savings bonds with a fixed rate
- You can choose between dividends (rolling maturities) of two, three, or five years.
2. Retail savings bonds with a fixed rate
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.
What are the RSA retail bond risks?
An RSA Retail Savings Bond is a government of South Africa investment that pays fixed or inflation-linked interest over a certain period of time. RSA Retail Savings Bonds are offered in the following forms: The Fixed Rate Retail Savings Bond series includes bonds with periods of two, three, and five years.
- When compared to equities, the risk is usually modest because the interest and principal investment will be reimbursed as long as the relevant governments do not default on their bonds.
- Bonds can be a great way to diversify your portfolio. They frequently outperform other asset types while others are underperforming.
- Because bonds are purchased and traded on the open market every day, they are liquid and easy to redeem early.
- If interest rates rise or inflation expectations rise, bonds may lose value on the open market. Because increased interest rates or inflation make the fixed interest offered by bonds less appealing, this is the case.
- Long-term returns on riskier assets, such as shares and real estate, are often lower. Bond returns, on the other hand, tend to outperform cash deposits over time.
- Bonds may be at risk if the government issuing them experiences a fiscal crisis, raising concerns about whether debt obligations will be met.
- There’s a chance the government won’t be able to pay you. They may be forced to default. In 2001, Argentina defaulted on its debt. The South African government’s finances, on the other hand, are in better shape, and the possibilities of this happening are slim. They do, however, exist.
Inflation is currently at 4%, and it is predicted to be low (about 5% each year) over the next year or two. This means that the gross return on a two- or three-year bond should be on line with long-term inflation forecasts of 2% to 3%, but keep in mind that this is before any tax implications.
Inflation is your number one adversary. As an investor, you must ensure that your assets at least maintain pace with price rises. This investment will “lose buying power” if inflation rises above 11.5 percent (it is now under 4 percent). That is, once again, highly implausible.
Do bonds make monthly payments?
Bond funds often own a variety of separate bonds with varying maturities, reducing the impact of a single bond’s performance if the issuer fails to pay interest or principal. Broad market bond funds, for example, are diversified across bond sectors, giving investors exposure to corporate, US government, government agency, and mortgage-backed bonds. Most bond funds have modest investment minimums, so you may receive a lot more diversification for a lot less money than if you bought individual bonds.
Before making investment selections, professional portfolio managers and analysts have the expertise and technology to investigate bond issuers’ creditworthiness and analyze market data. Individual security analysis, sector allocation, and yield curve appraisal are used by fund managers to determine which stocks to buy and sell.
Bond funds allow you to acquire and sell fund shares on a daily basis. Bond funds also allow you to reinvest income dividends automatically and make additional investments at any time.
Most bond funds pay a monthly dividend, though the amount varies depending on market conditions. Bond funds may be a good choice for investors looking for a steady, consistent income stream because of this aspect. If you don’t want the monthly income, you can have your dividends automatically reinvested in one of several dividend choices.
Municipal bond funds are popular among investors who want to lower their tax burden. Although municipal bond yields are normally lower than taxable bond fund yields, some investors in higher tax brackets may find that a tax-free municipal bond fund investment, rather than a taxable bond fund investment, provides a better after-tax yield. In most cases, tax-free investments are not suited for tax-advantaged accounts like IRAs.
Are bond rates fixed?
The price is set in stone. When you purchase a bond, you are aware of the fixed rate of interest you will get. The set rate does not fluctuate. Every six months, the Treasury announces the fixed rate for I bonds (on the first business day in May and on the first business day in November).
Are government bonds in South Africa tax-free?
In 2015, the government introduced tax-free investments as a way to encourage people to save.
The returns on these investments are not subject to income tax, dividend tax, or capital gains tax.
A maximum of R33 000 per tax year is allowed, with a lifetime limit of R500 000 per individual.
- ETFs that are categorised as collective investment schemes are exchange traded funds (ETFs).
For further information, speak with your bank or financial counselor. Existing accounts are not eligible for conversion.