It’s important to examine the bigger savings picture.
Before you make panic-induced changes to your financial plan or radically adjust your approach to retirement, it’s important to examine the bigger picture, writes Wouter de Witt, founder and director of Gravitas Tax.
On 26 May, the SA Reserve Bank, once again, hiked the interest rate by 50 basis points to 8.25%, causing consternation among South African consumers. Before you make panic-induced changes to your financial plan or radically adjust your approach to retirement, it’s important to examine the bigger picture.
The SARB hiked the interest rate for the 10th consecutive time, taking the prime lending rate to 11.75%, thanks to an increase of 50 basis points. This came on the back of a slight reduction in consumer price inflation, from 7.1% in March to 6.8% in April.
With higher interest rates being the result of a considered policy response to tame inflation, the average South African consumer is taking strain, thanks to increased borrowing costs and rising debt repayments. Those holding out for a reprieve will likely have to be patient until the end of 2024, all other factors being equal.
According to the SARB governor, Lesetja Kganyago, guiding inflation back towards the mid-point of the target band can help to reduce the economic costs of high inflation and achieve lower interest rates in the future.
“Reaching a prudent public debt level, increasing the supply of energy, moderating administered price inflation, and keeping wage growth in line with productivity gains would enhance the effectiveness of monetary policy and its transmission to the broader economy,” he advised the media following this latest interest rate hike.
Retirees and others with a wealth of investments or a surplus of cash in their portfolios (such as those invested in bonds) are in a position to take full advantage of the interest rate hikes. They earn an interest-rate reward on the money they have stashed away.
Investors have also been pleasantly surprised by the fact that the local equity market has performed above expectation, having apparently discounted South Africa’s grey-listing at the end of February.
For this reason, not everyone may be considering adjusting their financial plan or tweaking their retirement portfolio. However, there is no denying the fact that day-to-day costs are still prohibitive and erode one’s wealth over time, even leading consumers to reconsider insurance policies and save for retirement.
The good news is that South Africa may have reasons to be optimistic in the longer term. According to the International Monetary Fund, global inflation is expected to fall from 6.6% during 2023 to 4.3% in 2024 (it was at 8.8% in 2022). While Russia’s war on Ukraine still weighs on economic activity, China’s reopening after its 2022 bout of Covid-19 and pent-up demand in numerous economies should bring about both the financial and debt-repayment stability we all seek.
With these factors in mind, the way in which you adjust your portfolio will depend on how robust your savings are or whether you’re contending with bigger home loan repayments and/or credit card debt.
In a high-interest-rate environment, our rule of thumb is to tackle your debt first before topping up your investments. Take care not to adjust your long-term investment goals, especially those related to retirement, as this could invite costly fees and tax-related consequences. Remember, too, that you will be taxed heavily on any early withdrawal from a pension or retirement annuity. It would be wise to get a tax directive simulation from a tax simulation company to allow you to make an educated decision in regard to the tax payable.
Before taking any radical steps – or if you’re unsure of the consequences of an investment decision – we recommend that you consult with a a financial adviser. For better or worse, the choices you make today may affect your returns tomorrow.
* The views expressed do not necessarily reflect the views of IOL or its sister titles
PERSONAL FINANCE