I have a mortgage with a balance of R700 000. I have also saved R100 000. Should I put it in my mortgage or leave it for my retirement? I am 57 years old. I also have some retirement annuities approximately worth R2 million.
This question remains so relevant when choosing where to prioritise your savings and investments.
The first element we need to consider is the interest rate environment compared with the return you can expect from your investment portfolio.
In a lower interest rate environment, you are essentially paying lower instalments on your mortgage, and it’s easier to keep paying it off on a monthly basis. As interest rates increase (like the cycle we are currently in both locally and globally), the financial pressure of paying off this mortgage increases.
Combine that with lower returns in the stock market, and it would potentially make more sense to focus on paying off your debt and aim for a debt-free retirement.
I do however feel strongly that investors should prioritise their investment portfolios first, for a few different reasons:
- This is a long-term investment approach. Even if you are 57 already, and perhaps plan to retire at 65, you are still heading into a new investment term of another 30-odd years or longer.
- This means your portfolio will still go through various interest rate and market cycles.
- Equity is the asset class that provides the highest return in the longer term (seven years plus). It can potentially provide you with returns of CPI+6% or CPI+7% per annum over time, outperforming the interest rate on your mortgage.
- Most importantly, at retirement, you will require an investment portfolio sufficient in size to provide for your income needs on a monthly basis, for 30 to 40 years. It doesn’t help much if you have a paid-off mortgage, but insufficient funds to replace your monthly income at retirement.
I would rather recommend building up your investment portfolio at this stage, as you will need to live from these funds when you reach retirement. You have the added benefit in your retirement annuity of taking advantage of your annual tax benefits. You are allowed to deduct contributions to retirement funds up to the greater of 27.5% of your taxable income or remuneration on an annual basis up to a maximum of R350 000 per annum.
Legislation has also changed recently regarding the rules of how you are allowed to allocate your asset allocation within a retirement annuity (or any other retirement fund). This is referred to as Regulation 28. Until recently South Africans had a combined limit of 40% within these products when it comes to the offshore exposure component. It has now been increased to 45%, which I think is a fantastic opportunity to further diversify offshore within a tax-efficient vehicle.
I would recommend working with a financial advisor to thoroughly analyse your retirement provision position and your financial needs at that stage and ensure you are planning sufficiently towards that.