BOITUMELA NTSOKA: Welcome to the Money Savvy podcast. I am Boitumela Ntsoko. With interest rates on the rise, many people are wondering whether they should put all their extra funds into bonds or invest them. Elke Brink, who is a Wealth Advisor at PSG Wealth, joins us in this episode to share her thoughts on this topic. Welcome, Elke.
ELKE BRINK: Thank you. thank you for having me
BOITUMELA NTSOKA: Now, what should you consider before putting additional funds into your bond?
ELKE BRINK: I believe that this is a very relevant topic, especially for young people. I think investors basically always think that they want to prioritize paying off debt or paying off bonds and do that sector of their life first, if I can call it that, and then only start saving or investing. I think this is a very important mindset shift to make.
Ultimately, the ideal is for you to prioritize both. After all, when you retire or later in your life you [will] still need a fundamental portfolio to live off of, so you need to be able to build a portfolio that can one day replace your income.
If you prioritize paying off bonds for too many years in your life and you don’t start investing and saving, you simply don’t have enough time to build the portfolio you’ll need one day when you retire.
So I’d say it’s important to prioritize both from day one. Yes, you do need to pay off your bond, but for me the priority is prioritizing the investment portfolio because the value of time and compound interest is far more valuable than losing maybe 10 or 20 years – or even more – focusing on one thing .
BOITUMELA NTSOKA: And if you decide to maybe focus on both, what percentage split would you recommend?
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 vary in different phases of the market – it’s important to first see what interest rate you’re paying on your bond. It will be different, maybe for different people at different stages, [such as] if you took a loan or if you took a bond. Along with what cycle are we in the market? Are you getting high yield in the market or are we in a lower yield 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 getting a significant return on an investment portfolio, you’re definitely better off with an investment portfolio. [But] if we are perhaps in a higher interest rate and lower market yield environment, that can change.
So I definitely wouldn’t see it as a stagnant solution. It will change with market cycles.
But I think it’s important to find a good balance between making sure you save enough for retirement and making sure you have an emergency fund. You don’t want to increase your debt level in the event of an emergency, and it’s better to have short-term cash available in case you need something. And then along with that you can pay off the bond.
So I think it’s always good to go and sit down and do the analysis – either by yourself or of course it’s always recommended to sit down with a professional advisor who can really give you the right guidance on how to split it up and how it’s going to work in your portfolio.
BOITUMELA NTSOKA: Now that you have an access bond, how does this scenario change?
ELKE BRINK: An access bond has many advantages. There are advantages that you have, the funds available. So basically it’s going to be a type of bond that you take on a home loan for example, and if you put more into that type of investment or that type of bond, you’re essentially paying for the house. But the funds are available. If you have a short-term need for cash, you can borrow again from this access bond. So this can be seen as a benefit for what I just mentioned – having short-term cash available when an emergency or requirement arises. I think it’s just important to keep the bigger picture in mind that you’re still going to need to build a portfolio that you’re going to live off of one day.
Living off an access bond is not recommended. You will also need to diversify the various asset classes in your portfolio.
I think it’s also important to just make sure what rates you’re paying, also bearing in mind that whatever type of bond you have, you end up paying for it. So make sure you know exactly what type of bonds and what rates you have and just keep that in mind when you’re also building your portfolio for yourself where you save and invest every month.
BOITUMELA NTSOKA: If you own a rental property, is it better to use those funds to pay off the mortgage?
ELKE BRINK: Basically, the ideal place that you want to get to one day, if we look at where we want to be, at least when we retire, is that you want to be in a space where you have no debt or you have there is nothing yet to be paid. I think it can be a pretty 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 additional properties that you rent out, in many cases it only becomes profitable after your bond is paid off. I think in most cases usually the rental income only supplements some of the bond payment you have or doesn’t even completely replace it. So I think usually you don’t start making a profit until after the bond matures.
So there are scenarios where you would like to prioritize. But again, I would be careful [not] just prioritize it and potentially lose 20 years of portfolio building where you could have built a substantial investment portfolio that can help you later in life.
So a general rule of thumb when it comes to retirement planning, when building a sufficient portfolio, is that you should save 15 to 20% of your income over your working life, which is typically around 40 years, assuming attention taking into account inflation and an average yield of about 10%.
Therefore, building a portfolio requires a lot of commitment [so] that you will be able to replace your income in retirement. I think that unfortunately, and especially in South Africa, too many investors wait too long and save too little.
The reason only about 6% of people can retire is because I think we’re just waiting too long. We start saving only in our forties, or even in our fifties. I think there are two mistakes – we waste a lot of time and many investors save too little. So even if you’re earning a decent return on your portfolio, you’re not saving enough in interest compared to what you’re earning to really have a proper replacement rate that you’ll one day be able to replace the income you were earning before retirement.
BOITUMELA NTSOKA: Here’s a tip about rental property: If I’m retired and have a rental property and it’s paying off, would that be a good way to generate income to supplement my living expenses?
ELKE BRINK: I think extra income is always helpful and it will depend [on] what does your portfolio look like. Do you only have rental income, or do you also have investments to live off of? I think the ideal sustainable investment portfolio will always consist of multiple asset classes, and by that I mean exposure to stocks, cash, and bonds. Local and offshore exposure and property also fit in as a stand-alone item on assets. I think that generating income from rental properties carries with it risk. There are many maintenance costs and things like fees and taxes that need to be paid for the property as well. I think the income you earn is a bit limited at times; it’s not like you can increase your asking rental income by 10 or 12% every year. You may be able to add inflation – if and by that much – if the long-term average return on a stock portfolio, for example, can be more than 10%.
Therefore, if you have a well-diversified portfolio, the percentage of return you can potentially earn can be much higher in a more diversified portfolio including equities, compared to simple rental income, which may not even be guaranteed.
There might be a few months that you don’t have anyone filming, or something else might happen in terms of that. I think it’s just not a hundred percent guaranteed salary. So I would recommend that you diversify – not only have rental income, but also other asset classes in your portfolio.
BOITUMELA NTSOKA: Now, back to paying off your bond vs. investing, if I decide to go the investing route, what ideal financial position should I be in before doing so?
ELKE BRINK: I don’t think there is ever a perfect financial situation. I think that’s the single most important thing about investing, it’s better to just start with something than to wait for the moment. Many – and especially young people – sometimes feel that they don’t have much to invest in. Now they just don’t do anything. By considering the time and cost of compound interest, even just investing Rs 100 will make a big difference over 20 or 30 years.
So my recommendation with investing would always be to start as early as possible, even if it’s very little. Don’t try to time the market.
Especially in the space we’re in right now, for example, there’s a lot of uncertainty in the world – not just in South Africa, but around the world. Many people hold back from investing, waiting for better times or waiting for things to turn around. Before you know it, another three years have passed and you’ve missed some good days in the market, days that no one can predict. We never know exactly when the positive days will be, and we also never know when the negative days will be.
It’s basically impossible to try to time the market, so it’s just a matter of “timing the market” as they say. So I would just say start if you can with what you can and take advantage of the time
BOITUMELA NTSOKA: And what investments should you consider if you have, say, adequate retirement and life insurance?
ELKE BRINK: I think if you are already covered in this area, [if] you have all the appropriate risk coverage, and [if] you [have] already made sure you are in good shape for retirement then I would add to that. I would, first of all, be sure that I am one hundred percent comfortable in retirement. I think that certain types of retirement products have certain tax advantages, which is why many people prefer these products in the first place.
But, along with that, I think you can start building a portfolio that’s maybe more affordable, that can also be used in retirement for vacations and travel, and maybe also be seen as an emergency fund. I don’t think anyone has ever complained about availability [excess] funds at retirement. I would definitely recommend just relying on it.
I think we may see the power of inflation again now, and as life gets more expensive, I would prefer to plan more conservatively and plan for life getting more expensive, [so as] to maintain the same standard of living. So rather, save conservatively and invest more than you might think you’ll need, and ensure that one day you’ll be able to support the lifestyle you’d like.
BOITUMELA NTSOKA: Thank you very much, Elke. It was Elke Brink, who is a wealth advisor at PSG Wealth.