Question:

I read your reply in the article entitled 'How much should you save?" and have the following question:

I am of similar age (38), earn a similar salary (R18 000) and have a similar amount saved up in my RA.  However, I do have substantial equity (R600 000) in the flat I own.  May I add the equity to the amount I have in my RA (about R300 000) for the purpose of calculating how much I should save towards retirement?

Answer:

In general terms, the value of your home should not be included as part of your overall retirement capital. A home should fit into the "category" of Lifestyle Asset. These are assets such as homes, cars, boats, motorbikes (and so the list could go on) and are broadly regarded as those assets you live with.

Regardless of whether you are working or retired, you need a roof over your head and therefore your home cannot be allocated to providing you with an income.

However, as with many things financial, there are exceptions to the rule. For one, many South Africans have turned to residential property as their preferred asset class and therefore may approach things differently. If you own a home above what you require in retirement, the option is open to scale down and use the difference between the sale of your bigger (more expensive) home and your new home to add to your retirement capital for income.

Some investors, however, have chosen to keep their first flat, apartment or even house and rent it out. By doing so, their new home becomes their Lifestyle Asset and the previous home is moved to becoming an asset in a truer sense.

If this is the case, then you would have two primary choices:

• Sell the rental and have the proceeds bolster your retirement capital.  For calculation purposes, one percent growth above inflation is a globally accepted capital growth rate over time for residential property. Assuming a long term CPI of 6 percent and, therefore, seven percent nominal growth rate, a property should double its value about every 10 years.

• Keep the rental and have the income subsidise your needs thereby requiring a lower income drawdown from your retirement capital.  Income yields vary quite substantially depending on area, size (two smaller properties can often yield a higher income than that of one property with their combined value) and age of property. An income yield of nine percent is a fairly robust return on the value of the property (i.e. R90 000 per year for every R1-million; bearing in mind that is often before maintenance and income tax.)

The final decision on which approach to take would be dependant on the market value, expected income yield as well as any tax considerations (CGT, tax on rental income vs no tax from capital withdrawals from an investment).

Either way, it would be prudent to sit with a CFP^® professional to guide you through these types of scenarios to see which best suits you and how the rest of your retirement needs should be addressed to complement it.

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