Most parents want to leave their children a legacy, but what if you could leave your children a secure retirement? A retirement that they never have to save a cent towards and that is completely tax free?
According to Nic Andrew, executive head of investments at Nedgroup Investments, this is exactly what would happen if you invested R2 750 a month into a tax-free investment from the day your child was born until they turned 18 – and then left the capital to grow for a very long time.
Assuming you invested R2 750 a month, you would invest R33 000 per year which is currently the maximum annual amount allowed in a tax-free savings account (TFSA).
The current life-time cap is R500 000 which you would reach by your child’s 15th year, but in Andrew’s example, he assumed government increases this cap to R600 000. You would reach this limit by the time your child turned 18.
As this is a long-term investment, you would invest in a fund with growth assets that include South African and global equities, so ideally a unit trust fund.
The long-term average annual return from equities is around 7% above inflation, so by the time the child turned 18, you would have invested R600 000, but the fund would be worth R1.1 million in today’s value, having adjusted for inflation.
Think about that for a moment: your child would have R1 million, in today’s value, on their 18th birthday.
The importance of staying invested
But here is the important part: instead of cashing the money in to buy a BMW or a gap year, the child keeps it invested until age 60.According to Andrew, by the time your child is ready to retire, that investment would be worth over R20 million in today’s value.
Your child could draw an income of R130 000 a month and it would still last until they were 100 years old. And because it was invested in a tax-free investment account, the proceeds would never be taxed.
Even if the child had taken half of the proceeds at the age of 18 to pay for education or start a business, by leaving the other half to grow, they would still have R10 million on retirement – in today’s value.
Admittedly, not everyone has R2 750 a month to put away, but what if you just started with R500 a month? By the time your child turned 18 they would have a nest egg of R215 000. If the child left that for retirement and let the power of compounding take over, it would be worth R4 million in today’s value by the time they turned 60. How many parents have that kind of retirement benefit? All that from just R500 a month.”
Never mind the assumptions/projections or investment fund choices – you can tailor-make this to your clients choice. Just think about the culture of savings and financial independence that parents can pass on to their children. Off-course the investment goal can be different for every individual – but the power of the TFSA is wonderfully illustrated in this article.
Article by Maya-Fisher French Maya