Tax-Free Savings can be classified as “free” money and should be a no-brainer for individuals to max out their annual limits.
For an introduction into tax-free savings click here.
We often get asked “how much will we have after 15 years” or “what will I have in the account when I retire?“. Off the back of these questions and for our own personal interest, we decided to make a quick and easy calculator to let you determine exactly what your money will be worth in the future.
How to use the calculator:
- Open up the calculator in excel: Tax-Free Savings Calculator
- Click “Enable Editing” at the top
- To use this calculator there are 4 inputs you will need to type into the blue cells, namely:
1. Contribution Amount
This is the amount you intend to contribute or invest in your tax-free savings account each month. Remember because of the yearly limit, you are only able to contribute a maximum of R33,000 a year. What this means is you can only put in a maximum of R2,750 per month. You can contribute less each month if you prefer or unable to reach this amount. Due to some boring maths, you can easily tell that the result of contributing less is that you contribute for a longer period before hitting your R500,000 limit.
As an example someone who invests R2,750 per month will invest for 15 years and 2 months before they cannot invest any more (because they reach the R500,000 limit). Remember although there are no new contributions, the amount previously invested will continue to grow! Someone who invests R1,000 a month would take 41 years and 8 months to max out their limit.
Maxing out your contribution is a must if you have the available cash.
2. Period (months)
The period is asking you when you would expect to take out your money or dis-invest. This is NOT how long you will be contributing money for. Why? because as you may use up your available contribution limit before and then choose to leave the money in the account. So input when you intend to draw out the money even if it is longer or shorter than the period where reach your maximum contribution.
3. Yearly growth
Input the annual growth rate you would expect to see on your money. If it is a fixed income fund then it is fairly simple to input the percentage the fund is earning. If it is a equity account/unit trust that has listed shared underpinning it then it may be best to look at the historic performance. Although past performance is not a good indication of future performance (I sound just like a radio advert), it provides a useful base. Check a funds fact-sheet for the past return percentage and go from there.
CPI or inflation, now why is this here? It is here because the price of things is going to increase and we need to discount the money we have in the future to show what it would be worth today. This is called real return and you can read more about it here.
South Africa targets between 4% and 6% inflation with it currently sitting above 5%. The higher this percentage is the less you are going to have at the end of the day.
As with all forecasting there is a large amount of guesswork. This results in the outcome being fairly variable as you change the inputs. You can fiddle around and see that changes it makes but be aware there are limitations.
Taking into account inflation only on the cost is a conservative assumption. In essence as inflation takes its toll, the government will have to increase the annual and lifetime limits. This will allow you invest more and thus earn more. Your return assumption has a significant affect on the return and it is applied in a uniform method every year. In reality there is volatility and returns will be up and down each year which means timing may have a large effect (i.e when you buy in). Unfortunately we can’t predict this, nor time it correctly, which results in us only being able to make an estimate of a simple average.
In the end trying to work out what you will have one day is all down to the inputs. The probability of getting this right is unlikely at best. Truth be told the best that you can hope for is to die in your sleep (what a song!) . . .