OPINION: The top 5 flexible ways to save for retirement in a changing economy
With more than 40% of the global workforce expected to be gig economy workers (freelancers, temps, independent contractors, part-time workers) by 2020, the traditional way of saving for retirement is heading for redundancy. In the last of a three-part series, Lauren Willoughby, Retail Administration Manager at Sygnia, looks at retirement savings vehicles that suit gig economy workers.
My previous articles covered how gig economy workers can get a grip on budgeting and how to DIY your retirement savings plan. Now we get to how to execute that plan, which means choosing an investment vehicle – or a combination of vehicles – that best suits you and your retirement goals.
Here’s an interesting thing I found out about gig economy workers: although they’re tech savvy, when it comes to using tech for finances, they’re total luddites. Betterment’s 2018 Report: Gig Economy And The Future Of Retirement, put it more politely: “There appears to be a major disconnect when it comes to…tapping technology to maximise their financial security in retirement.”
This needs to change, because there have been a slew of new fin-tech products coming onto the market over the past decade that are great for the self-employed. Many of these investment products are flexible, offer full transparency, allow you to have absolute control of your savings in real-time and, importantly, are low cost with low barriers to entry.
5 Flexible Investment Vehicles for gig economy workers:
1. Exchange Traded Funds
Ok, first, what are Exchange Traded Funds (ETFs)? They’re unit trust funds that trade on a stock exchange and combine the tradeability of shares with the diversification of an index fund. Or, in plain English, ETFs allow you to sit in South Africa and invest in a broad range of hundreds, or even thousands of company stocks locally and internationally at the click of a button. You can even choose to invest in niche markets that match your interests or ethics, like green energy, medicinal cannabis or 3D printing.
There’s a good reason ETFs are the investment vehicle of choice for 91% of millennial investors in the US*. First off, the fees are low – global ETFs carry annual fees that are typically less than 1%. You also have real-time, minute-to-minute updates 24/7 on your investments (if that’s what you want), giving you full oversight.
With close to 80 ETFs listed on the JSE – including the Sygnia Itrix 4th Industrial Revolution Global Equity ETF – and new ones listing each month, investing in global shares has never been this easy.
2. Tax Free Savings Accounts
A Tax Free Savings Account (TFSA) is actually just the name given to a variety of different savings products that carry certain restrictions to protect the investor. For example, there’s a set limit on fees that can be charged and you can invest only a maximum of R500 000 over your lifetime. So a TFSA could be a passive investment fund, an ETF or a simple money market account. The choice is yours.
A TSFA allows you to save for both long- and short-term goals without paying any tax on your investment, which means your investment will grow faster. All withdrawals and switches are tax free and, unlike retirement annuities, the funds are instantly available.
Also, you don’t have to start big or be tied to regular payments. Sygnia TFSA contributions start from R500 a month, whereas others start as low as R250 per month. Alternatively, you could choose to make an annual lump sum investment anytime before the tax year-end (maximum R33 000 per tax year). So when you get a little windfall from a big job, you could make a lump sum payment into your TFSA and know that the taxman can’t touch it.
3. Unit Trusts with offshore exposure
Remember that old adage about not putting all your eggs into one basket? Having some of your money invested in unit trusts that hold offshore assets is always a good idea, as you can gain exposure to a wider range of markets and cash in on new and growing industries, like tech start-ups.
It’s become very easy for anyone to invest offshore via a South African unit trust, which in turn invests in international markets. No offshore account or broker required.
You don’t have to jump through any international regulatory hoops to invest in these types of investment vehicles either. And it can be very cost effective – management fees for the Sygnia Skeleton International Equity Fund of Funds (SSIEFF), for example, are only 0.57% (ex VAT). The less the fees, the more money you have to invest.
The SSIEFF is a diversified unit trust fund, however there are higher risk unit trusts that potentially generate more growth, like Sygnia’s 4th Industrial Revolution Global Equity Fund. This fund invests in stocks for new technologies and innovations – we’re talking everything from bioengineering to clean energy. Fees for this fund start from 0.70% (ex VAT).
It all depends on your appetite for risk – and how old you are. The younger saver typically has a longer period of time to make up any losses than an older saver, so you ideally only want to consider high risk options in the early years.
4. Investment Accounts (Non-retirement Products)
These aren’t super high-tech or new, but an investment account is suitable for the self-employed because it allows you to save discretionary money in a large variety of funds and there is no fixed term for investing. And you can withdraw from it at any time if you need cash.
There is one drawback, though: it’s not tax free – you have to pay capital gains tax if you switch accounts or make a withdrawal.
5. Retirement Annuity
Yes, it’s a more traditional type of retirement savings account, but it’s not nearly as restrictive as a pension or provident fund because there is no required monthly contribution. You can stop or restart the contribution, or reduce your monthly contribution (with no penalties) as and when you have the available funds.
Some retirement funds allow the member to control the contributions made – either via a once-off lump sum or fixed monthly contributions.
The downside? Retirement annuities are bound by legislation not to allow withdrawals before the age of 55.
On the plus side, your contributions are tax deductible – and it’s one way of forcing yourself not to dip into your retirement savings when the going gets tough.
Willoughby is retail administration manager at Sygnia. Views expressed are her own.