Adding securities to your family’s nest egg is a prudent way to boost savings

What is meant by a ‘nest egg’?

A nest egg refers to a bundle of financial assets saved over time with the aim of providing a passive income for you and your family in retirement and enabling you to choose a work schedule that suits your future health and lifestyle needs. A common and unfortunate misconception is that investing is exclusively for the rich (based on the inaccurate belief that building wealth requires a sizeable amount of money). However, the reality is that successful investment outcomes are accessible to those who understand that time is a critical factor when building wealth. It is not down to the amount of money being invested alone. This is especially relevant when considering adding securities to your family’s nest egg, as they have consistently proven to beat inflation over the long-term more effectively than any other single asset class. Most of those who consistently invest in securities over the long term are better placed to enjoy their retirement with far less negative impact on their lifestyles.

How investing in securities contributes towards passive income

Investing in securities over the long term generates both capital gains and dividend income. Capital gains are enjoyed when the value of a share exceeds the initial cost of purchasing the share, whilst dividend income is a financial return investors receive whilst holding securities, in other words securities not only provide a financial benefit once they are sold (by way of capital gains), but also provide regular benefits whilst you are invested in them (by way of dividends). Receiving dividends every quarter or every year is an excellent passive income source and hence a key asset class to consider as part of your nest egg. An added benefit of earning dividend income whilst you are contributing towards retirement is that it provides an opportunity to reinvest these funds into securities when they are attractively priced, in turn increasing your ability to generate further dividends in the future. Receiving dividend income during your retirement also limits the need for you to sell shares to fund your expenses (which would trigger capital gains tax).

Factors to consider when adding securities to your portfolio

I have mentioned the importance of adding securities to your nest egg over time to help generate inflation-beating returns and enjoy passive income in your portfolio. There are different ways of incorporating securities into your family’s nest egg, which are considered below.

Shares and exchange traded funds (ETFs) listed on the JSE

Investors can enjoy exposure to shares listed on the JSE through a direct equity portfolio which provides exposure to an index or portfolio of stocks (for example ETFs) or a single share (affording exposure to a particular sector of the economy). Both ETFs and shares provide passive income in the form of either distributions paid quarterly (in the case of ETFs) or dividend income paid bi-annually (in the case of locally listed shares). 

Shares and exchange traded funds listed on offshore exchanges 

Investors can diversify their exposure by not only investing locally (in ‘SA Inc.’ shares), but also investing in shares offshore. Individual investors have various means to invest in offshore shares and ETFs, the most common method being investing using their annual single discretionary allowance (currently R1 million per calendar year), whilst investors making use of trusts or companies to house their offshore investments can also make use of PSG’s institutional investor facility. Investing in offshore securities can contribute meaningfully towards your family’s nest egg, but I would encourage seeking assistance from a qualified financial adviser to guide you along the way.

PSG will be launching preferred rates for grouped offshore family accounts in March 2024, including linked company and trust accounts. By consolidating your family’s investments offshore at preferred rates, you will make a meaningful step towards achieving your investment goals and financial freedom.

Personal Share Portfolios (PSPs)

A final option is investing in local and offshore shares through a PSP. The benefit of a PSP is that it allows you to structure your retirement funds in such a way that you can invest directly in shares. No capital gains tax or income tax is payable within a retirement annuity, so you can have direct exposure to shares without the tax implications associated with a separate direct equity portfolio. Regulation 28 of the Pension Funds Act currently limits equity exposure in retirement funds to 75% (whether local or offshore), exposure to local or international property to 25%, and foreign investment exposure to 30%. There are also additional restrictions, including sub-limits for alternative investments and the percentage of a portfolio that can be held in offshore assets.

Holistic financial advice

Since retirement planning requires holistic financial advice, it is advisable to consult a financial adviser to ensure your family’s nest egg is well positioned to deliver on your needs.