[ADVISOR VIEW] The lower your tax rate is and the shorter your investment horizon is the more exposure you can take to retail bonds: MariusFenwick - thisiswealthup. PersonalFinance
Given the current global market turmoil which is caused by various factors ranging from increasing inflation to geo-political tensions, SA Retail Bonds with a current yield of 11% per year over five years offer a compelling alternative to growth assets especially when income is required from such assets.
Let us please agree that equity investments and the periods that their effectiveness is measured should exceed seven years. Periods shorter than this distort the benefit of investing in equities which factually is the only asset class to provide inflation-beating returns over the full investment term of 10 years + if taxes are taken into consideration. Retail bonds fit perfectly into the medium term .
The main objective of any investment must be to achieve returns ahead of inflation. If your investment fails to beat inflation, then you are factually becoming poorer every year. Retail bonds generally provide returns ahead of inflation but by how much entirely depends on your personal tax rate. I must also point out that inflation is just a statistical number made up of weighted allocations of certain items in a shopping basket. Personal inflation varies from person to person depending on their spending patterns and medical requirements. The higher your medical expenses are, the higher your personal inflation rate is bound to be, be very careful of accepting declared inflation numbers at face value.As I mentioned earlier, the above is not really the problem.
In the above example, if a person requires R10 000 per month from a retail bond and their marginal tax rate is 30%, then they will need a bond of R1 558 441 to start with taking the effective yield of 7.7% as indicated in the first table into consideration. If in some way the annual increased income requirement can be ignored or postponed to after the five-year term, then a new bond will be required after five years.
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