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Does a Retirement Annuity Make Financial Sense?

For a business owner, the number one retirement rule is not to rely on your business as your only retirement strategy – the risks are too high. So does a retirement annuity make financial sense?

Maya Fischer-French

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Many business owners have had to face the reality of either postponing their retirement or seeing their retirement plans wiped out due to the economic realities at the time they want to sell their business.

The question is whether or not one should be saving for retirement in a retirement annuity.

We-recommend-tickWe recommend: When Is The Right Time To Panic About Retirement?

The Upside and Downside

A big plus for business owners is that a retirement annuity is completely protected from creditors. It is the one asset that your creditors cannot touch, not even SARS. This means even if your business fails, your creditors cannot touch your retirement provision.

Your contributions to a retirement annuity are tax-free up to 15% of your income (this is likely to be raised to 27% in 2016), and no tax is paid on dividends, interest or capital growth.

The downside is that investment restrictions apply in order to ensure the savings are used for the intended retirement purpose. You can only access your retirement annuity at retirement age (55 is the earliest you can select) and then you have to invest two-thirds into an annuity to provide you with an income in retirement and this income is taxable.

The counter argument is to rather invest in a discretionary fund such as a unit trust or share portfolio. One would have full flexibility and although you would not receive the tax benefit on the contributions, nor on the growth of the fund, in retirement you do not pay income tax on your withdrawals (although capital gains tax would apply). This investment would not be protected from creditors.

Weighing up the pros and cons, the tax benefits of a retirement annuity are significant and cannot be ignored, especially at the current rate of dividend tax and capital gains tax. In addition, the protection from creditors offered by a retirement annuity is especially valuable to business owners.

Research by Rowan Burger, executive: Large Corporate Segment at Momentum shows that over a 35 year period the tax benefit of contributing to a retirement annuity versus a discretionary investment for a high income earner increases your income in retirement by a massive 67% – this is even taking the income tax paid in retirement into account.

Lump Sum on Retirement

Burger’s assumptions were based on an individual with a starting salary of R500 000 per annum increasing at inflation each year, contributing 15% of their pre-tax salary per year with a marginal tax rate of 40%. Burger assumed that the individual started saving at the age of 30 and retired at the age of 65.

He assumed a growth rate of 10% per annum on both investments adjusting the unit trust returns for capital gains, dividend tax and tax on interest but took into account that a retirement annuity would cost 0,1% per annum more than a unit trust given the governance costs. (See table one)

Due to the tax deductibility of the contributions and the fact that no tax is paid on dividends, interest income or capital gains, the net effect at retirement is R38,7 million in a retirement annuity versus R15 million for a discretionary investment. Before you commit to buying a Ferrari with that impressive number, remember that this is a little more than R5 million in today’s money.

We-recommend-tickWe recommend: Reaching Retirement with Enough Capital

Income in Retirement

As tax is paid on the income drawn from an annuity in retirement, Burger also calculated the net (after tax) income from both a living annuity and a unit trust. The unit trust investment now attracts far less tax. Due to the lower taxes paid by individuals over the age of 65, the marginal tax rate has fallen to 35%.

Burger assumed that the individual would draw 5% of the capital annually and the funds would grow at 10% per annum.

Because a living annuity in retirement also does not attract dividend, interest or capital gains tax, the net growth rate will be higher than a discretionary fund. So although in the first year the difference between the two incomes is 67%, by the time you reach 75 that difference is 101%. (See table two)

So taking all the various tax factors into account and assuming similar investment portfolios, a retirement annuity makes financial sense as long as you ensure that it is a low cost product fairly comparable to a unit trust investment.

retirement investment plan

MAYA FISHER-FRENCH is a financial journalist. Her popular blog, Maya on Money is an extensive collection of money-related advice. She is the author of the award-winning, Maya On Money: Implement Your Money Plan.

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1 Comment

1 Comment

  1. MrLamprecht

    Oct 16, 2015 at 09:48

    No mention of TFSA’s as an option to dovetail with an RA?

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Investing

(Infographic) The 10 Things You Should Cover In Every Investment Pitch

If you want to wow potential investors, you need to cover your bases.

Matthew McCreary

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If you’ve ever watched Entrepreneur’s original series, Elevator Pitch, then you’ve probably seen smart founders make dumb mistakes while pitching their ideas to potential investors. They might flub an answer or get tongue-tied, or they might just be a little boring. Other times, you might notice that something seemed off about a pitch, but you can’t quite put your finger on why.

Investors are gambling every time they put money into a new project or idea. Your job when pitching is to prove to them that you’re worth the risk. That means you’ll need to not only show them the possible upside of what they have to gain, but also be clear about what they could possibly expect to lose and their odds. In other words, you need to give them a holistic view of what you do, not just the one good idea.

You might have pitched an investor yourself and thought you crushed it, only to hear that the investor isn’t interested. If that’s the case, there’s a chance the pitch was missing one of 10 essential elements.

This infographic by Buffalo 7 breaks down 10 slides you should have in your next investment pitch deck. If you’re not presenting formally, though, you can still keep track of these aspects in your head and make sure you cover each one. They include:

  1. The vision, where you concisely explain your idea.
  2. The problem. Why is your vision necessary or helpful?
  3. The opportunity. What is the market size, and how can you position yourself to earn a share of it?

Related: How To Pitch Your Business, Product Or Idea To Industry Experts

This is just the start, though. Check out the infographic below to see the rest of the slides you need when pitching investors.

1541174287_investment-pitch-infographic

This article was originally posted here on Entrepreneur.com.

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‘Shark Tank’ Investors Reveal Top 5 Tips To Make Your Business Famous

Is your business worthy of fame? If so, pay attention to what the Sharks have to say …

Eric 'ERock' Christopher

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Shark Tank

Shark Tank enters its tenth season as popular as ever. Over the past decade, millions of people have watched fascinated as entrepreneurs pitched their business ideas and startups in the hopes of winning an investment and support from self-made millionaires and billionaires.

The multi-Emmy® Award-winning reality-based show has had a tremendous impact on the business world and has been a major influence on the increased popularity of becoming an entrepreneur. Over the years, the show has evolved into one of the world’s top platforms to launch a business and recently reached an astonishing $100 million in deals offered in the Tank.

I was recently invited to attend a private event hosted on the set of Shark Tank to celebrate their 10th season and met with all the Sharks and most of the guest Sharks for the current season. This year’s guest list includes luminaries:

  • Charles Barkley, Hall of Fame NBA star and TV analyst
  • Alex Rodriguez, legendary baseball player and businessman
  • Rohan Oza, an iconic brand builder and marketing expert
  • Sara Blakely, founder and owner of SPANX brand
  • Matt Higgins, the co-founder and CEO of RSE Ventures and vice chairman of the Miami Dolphins
  • Bethenny Frankel, TV celebrity, author, and founder of Skinnygirl brand
  • Jamie Siminoff, the CEO of RING, who rejected an investment offer in season 5, but went on to sell his company to Amazon for a whopping $1 billion.

My better half was also invited, and we arrived promptly on time at Studio 24 inside of Sony Pictures Studios in Culver City, CA. We were greeted by the cordial staff who informed us that the Sharks were still filming the last takes of the day. After several minutes, we were invited to chat with the Sharks on the main floor where nervous entrepreneurs excitedly pitch their companies to the investors under the bright lights of the studio set.

I was curious to know what excited the Sharks the most about their tenth season and what they believed to be the best advice for an entrepreneur to help make their business famous.

1. Create an ingenious product

When asked, Lori Greiner said, “It’s a mix, right? Of smart marketing and ingenious product. For example, Scrub Daddy was a technology. So, taking that one sponge, which was revolutionary, changed the whole sponge arena. We now have, to date, 20 different SKUs, and we have 30,000 new retail locations and 170 million in sales. That’s what takes it from one idea to a global brand.”

Of course, skillfully promoting your product on a platform like QVC is another excellent way to make your business famous. The day after the Scrub Daddy episode aired, Greiner helped CEO Aaron Krause sell their entire inventory of 42,000 sponges in less than seven minutes on QVC.

Related: 6 Great Tips For A Successful Shark Tank Pitch

2. Leverage social media marketing

barbara-corcoran

During my chat with Bethenny Frankel, she stressed, “Social networking is so important. Also being a little bit disruptive now … and you have to be creative. You have to be creative. The President was the most disruptive candidate that there’s probably ever been in history. He got people’s attention, and young entrepreneurs need to get people’s attention in some way. So be a little disruptive.”

Matt Higgins responded, “I’d say that you have to understand social and digital marketing. You can’t survive unless you understand Instagram, Snapchat or all the tools out there. You have to be contemporary.”

Barbara Corcoran claimed, “Every one of us successful entrepreneurs, for the last two years, were phenomenal at social media. It’s true. No exceptions.”

No smart entrepreneur will deny the power of social media when it comes to making your company famous. With more than 2 billion people worldwide using some form of social media, any business can put their business in front of a large audience, especially if they can create content that goes viral.

3. Build a community

Daymond John stressed the value of building a community. “You’ve got to build a community,” stated John. “Nobody needs to buy anything new in this world. They only buy it because there’s some form of community and/or need that you are supplying for them.”

John speaks from experience. He built a successful clothing empire by creating a vast community of his own via his clothing brand FUBU. John wisely invested in celebrity endorsements, making him an early pioneer of modern influencer marketing.

If you lack the resources to build your own community from scratch, you can leverage the power of others. Partnering with influencers who have cultivated their own communities allows you to introduce your product or service to larger audiences. In fact, some consider Shark Tank to be the world’s largest business influencer platform.

4. Devise a publicity hook to win earned media coverage

Barbara Corcoran also said, “I’d say you need a publicity hook. Some hook, angle or gimmick that grabs the attention unfairly from your competitors.”

Remember, Shark Tank is a unique combination of reality television, business acumen, and entertainment. Doing something unique, different, or disruptive can get you significant media attention and abundant free publicity… especially if you’re able to leverage that publicity and captivate the show’s producers, who decide your fate as to whether you’ll appear on the show.

Regardless if you want to appear on Shark Tank or not, being featured in the media is a way to differentiate your business from the competition and reach a broader audience. Be creative and willing to take educated risks when it comes to getting noticed by the media. You should always be actively building relationships with media representatives and ask for their insights when formulating your plan.

Related: Shark Tank Funded Start-up Native Decor’s Founder on Investment, Mentorship And Dreaming Big

5. Know your strengths and stay focused

When I asked for billionaire Mark Cuban’s insights, he thoughtfully replied, “Knowing your unique advantages, play to that, and your strengths. And focus. You know, what happens is very often people start with an idea, get a little bit of traction, then it gets hard. And when it gets hard, they start looking for other things to do as opposed to playing to their strengths. Because businesses aren’t supposed to be easy. You know, if they were easy everybody would already be rich, and we’d all be sitting on a beach somewhere. And so, when it gets tough, you gotta dig in and work hard. I’d say the final thing I’d add is that sales cures all. There’s never been a business that succeeded without sales. So, if you focus on selling … if you’re able to sell … and that’s something that is one of your core competencies, then you’ll be okay.”

These are wise words from one of the world’s few billionaires.

This article was originally posted here on Entrepreneur.com.

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The Best Way To Get Your Teenager To Start Investing Right Now

Jeff Rose advises a young fan on where to start his investment journey.

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In this video, Entrepreneur Network partner Jeff Rose talks about receiving a letter from a young investor, who is looking for advice on how to begin investing.

Rose talks about the act of actually doing the investing versus worrying about reading books or asking others about the process. Taking action gets the most results, since you are able to make mistakes and start the learning process. Taking action also leads to more experience, which is to say if you begin investing as a teen, you will be much more savvy about investing as a twenty-something.

In answering this young investor’s concern about investment direction – the fan hopes to balance short-term gain and long-term gain, as well as to establish some padding for a future business – Rose turns him in one specific direction: A Roth IRA. When he was younger, Rose didn’t even know what a stock was until far into his college years; during this time, he discovered the Roth IRA and learned of its compounding power, as well as the accessibility of an initial investment.

As another route, Rose also mentions starting a business. This path, Rose explains, will help you achieve the most return on investment.

Related: Making International Investing Simple And Transparent – CybiWealth Digital Platform

Click on the video to hear more tips for a younger investor.

This article was originally posted here on Entrepreneur.com.

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