Hi everyone
This is a bit of a plea for guidance, as I'm really not sure what makes the most logical sense to do in our case. I'll try and organize this post as much as possible, starting with the investment options available here in South Africa - I'll put all the amounts in dollars, will make it a bit easier to digest. Current exchange rate is about R16 to the dollar, which is... terrifying, and is also a large part of why I'm unsure of what our plan should be.
To the wall of text!
Available investments
First, there's what's known as a retirement annuity (RA). I believe this is roughly equivalent to a 401K, in that it allows you to stash up to 15% of your income in a tax deferred account. You're only taxed on your income, minus what you contribute to the RA. This amount is now being raised to a maximum of 27.5% for the new financial year, as of March 2016. This is pretty massive, as you'll only be taxed on 72.5% of your income, if you contribute the maximum 27.5%. The upsides to an RA are fairly good - any capital appreciation, dividends, etc, are entirely tax free, and the account is protected from your creditors. The chief downside is that your RA is only accessible once you hit 55 years of age, but it's that way because my country is absolutely terrible at saving, so all in all, it's likely a good thing.
Secondly, we have a tax free savings account - this was introduced last year. This allows you to save a maximum of roughly $1875 per year of your after tax money, and any and all proceeds and accumulation is completely tax free. This account is capped at about $31250, which will take about 16 to 17 years to hit with the low monthly maximum. You can invest this money however you want if you go via a broker or ETF platform, which is quite nice. The downside is the low yearly limit, and worse, if you take any amount out, that's it, it's gone. There's a maximum contribution per year, and going over that hits you with a 40% tax. It's another way the government is trying to encourage long term savings - you're penalized if you take any money out before it's been there for a while, so you'll lose out on any compounding.
Thirdly, you have your standard ETF's and unit trusts. The unit trusts vary between being horrendously overpriced (TER of 2% plus), to some newer UT's that are passive (TER of 0.4%, cheapest in the country, and where my RA is sitting). The ETF's also range in price, but on average, they have a TER of about 0.3% to 0.5%. The international ones (DBXUS for instance) have a TER of about 1%, I believe.
Mortgage
This is the doozy - we bought our home 2 years ago for about $78 000, with a 100% mortgage over 20 years. When we bought, prime was a whopping 9.5%, and it's gone up now to 10.25%,as of the 28th Jan. Ours is marginally below that, but let's say it's about 10%. Having done the sums, we realized that after 20 years, we'd have paid about triple what the property was actually worth, so we've been contributing extra each month to try and bring it down. We owe about $60 000 now.
This is further complicated by the fact that in Cape Town, rents are ridiculous. To live in an equivalent house, the rent would be fairly close to our mortgage payment. If the rents were, say, a 1/4 of the mortgage, then we'd much rather do that , but it makes sense to buy, if possible.
So, the question is, how should we proceed? Do we max out our RA and tax free savings, and contribute whatever's left over to the mortgage? Or do we hammer the mortgage, and contribute less, if anything, to the retirement accounts? The tax free savings seem like too good a deal to pass up, but the mortgage costs us an insane amount of money each month. On the other hand, do we really want tie up our entire net worth in a house in a country where the economy is keeling over? At least via the investment accounts, one can invest in foreign markets, and try and hedge the Rand's depreciation.
My inclination is to max out the RA and tax free savings, if only to gain exposure to the rest of the world. If we pump everything in to the mortgage, then yeah, we may have a paid off house, but nothing much else to show for it.
I'd appreciate any and all opinions here - thanks in advance!
