Secure your child's retirement in South Africa

Christopher Mills
October 3, 2022

As a parent, I'm sure the thought of securing your child/ren's future has crossed your mind more than once. Perhaps you've even started tucking some money away but you're not sure exactly how much or where to put it. Well, today I want to share my approach to this and what I've done for my child in the hopes that it will assist you. I remember when I first started investigating this, I struggled to get myself into a position where I could take action. I feel like I've come up with an interesting way of doing this, not your usual save money and let it grow for your child, but a method that really does set your child/ren up.

South Africa has something known as a Tax-Free Savings Account (TFSA), this is an investment vehicle that allows you to invest up to R36,000 per year until you hit a ceiling of R500,000. You don't have to put R36,000 away each year, you can put far less if that's all you can afford, but the maximum is R36,000 per year and once you reach R500,000 you cannot contribute further. Any money invested in a TFSA is tax free - what this means is that any dividends or profit earned from the investment are not taxed so whatever the account grows to, that money is yours and you pay no tax!

I look at a TFSA as a bucket in which you can put assets. What I mean by this is that you open a TFSA and then you need to decide what assets to put inside. For example, you can open a TFSA and then invest in the S&P500 ETF which you place inside. This means you're buying the S&P500 each month and because it sits within a TFSA, the growth the S&P500 sees over the years is tax free. Another great option is a global ETF which invests in stocks around the globe instead of only in US stocks like with the S&P500. You could also put in the JSE All Share, JSE Top 40 or whatever you wish.

What did I do? I opened an account with Satrix, in my child's name. I then opened a TFSA account with Satrix and selected to invest in their MSCI World ETF, which I placed inside the TFSA account. This makes it really sound complicated but it honestly isn't. You're opening an account with Satrix and once your account is open, you login and then open a TFSA. Once the TFSA is open, you simply choose the instrument/asset to put within - Their website makes this a lot easier than it sounds here. Coming back to what I was saying, once the accounts are open, I'll then be making a deposit every month until I reach that R500,000. My aim is to invest R36,000 a year into the account in hopes to have reached the R500,000 after almost 14 years. This means that before my son has finished school, I'll have reached the maximum amount allowed. That's my aim at least, not so easy putting that amount away every month.

Here's the important part: although I'll have made R500,000 in deposits, we haven't looked at growth yet. Let's take a quick look at that, that's where things get exciting. Let's say we manage to invest R36,000 per year for 14 years and the MSCI World Index returns an average of 7% per year, similar to inflation for ease of explaining this. After the 14 years, this is how much we (your child) will have:

R884,763.70

I should note, the S&P500 has returned closer to 10% per year on average when we look back over the decades. There's a substanial difference between 7% and 10% in this calculation, 10% return would take that amount from R884,763.70 to just over R1,000,000.

Now, what we really want to look at here is what happens if this money is then left until your child reaches 65 years (when he/she would potentially hope to retire). The whole aim of this is to invest aggressively into the TFSA and then leave the money there to see what it becomes when your child wants to retire because it may well be enough to afford them to retire, meaning they won't have to invest themselves ever, which buys them incredible freedom. Or, they decide to invest further which really starts to build generational wealth.

Here's the answer:

R27,886,881.94 - Yes, that's almost 28 million Rand!

And, because it's 7% return and inflation is roughly 7%, that +- R28 million is in today's terms, meaning that would be like having R28 million now.

This is the power of compound interest and patience at work!

Let's recap quickly:

You've invested R36,000 per year for the first 14 years of your child's life, and then you've stopped contributing and left the money. By 65, your child will have almost R28,000,000. At this point, you can apply the 4% rule - In the first year of retirement, you can withdraw up to 4% of your portfolio’s value. If you have R1 million saved for retirement, for example, you could spend R40,000 in the first year of retirement following the 4% rule. Let's apply that to the R28,000,000 - That would give you R1,120,000 per year to retire on which is just short of R100,000 per month which is a massive amount.

I hope you're starting to see just how incredible this is. Your child can live their life, get to 65, and will then have almost R100,000 per month to retire on which is an incredibly comfortable retirement. That's without them having to save a single cent in their life.

One Important Note

There is one thing I came across that I had to think hard about, this is important. Because you opened the account in your child's name, when they turn 18, it becomes theirs and they're able to withdraw that money as they wish. My opinion is that if this is a strategy you want to use, it is crucial to educate your child on the plan of action to ensure that they remain the course.

Now, imagine you've taken the time to teach your child/ren basic financial education, you've taught them to spend less than they make and invest the difference... that R28,000,000 will be substantially larger by the time they retire, putting them in a position to really set themselves up with their kids and their kids, and so generational wealth occurs. They often say, it only takes one person to change generational wealth. Well, this is the one thing you can do to do that!

Another assumption we've made here is that the yearly allowence will remain R36,000. This might not be the case, looking at the documentation on SARS' website shows the following:

We can see that the yearly amount was adjusted from R30,000 to R33,000 after 2 years, and then adjusted from R33,000 to R36,000 after 3 years. There's a chance the allowence will increase but looking at the SARS website, it doesn't seem like it will for a long time but let's see what happens. If it does increase, that's even more opportunity to create some serious wealth.

Drop me a comment below, what are you doing for your child/ren?

Christopher Mills

I run a successful agency, my other passion is personal finance.

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