Retirement tax calculator optimised

Retirement piggy

When we invest in different asset classes, each is taxed differently. Depending on where your money is invested when you retire, your effective tax rate will differ. This got me wondering, how badly can you fuck this up? Will you, by investing in the wrong asset classes, keep yourself from living the good life? About three months ago, I made a simple excel sheet to calculate the effective tax rate during retirement. This retirement tax calculator can be found here.

At that time I manually optimised it to determine what my effective tax rate would be if I simply invested in a Tax-Free Savings Account (TFSA) and the rest in shares. My effective tax rate if I planned for a salary of R40 000 per month, would be 5.8%. I then applied the excel solver to this sheet and optimise it even further. To start, let’s do a quick recap of the tax you pay on different asset classes. For this discussion, I will assume you retire at 65.

Tax on retirement annuities

For Retirement Annuities (RAs) the tax rules during retirement are simple. Well, nothing in tax is simple, so let’s say simpler than doing triple integrals. You declare everything you withdraw as income, which is taxed at your marginal tax rate. There is also a tax break during retirement of R135 300 if you are over 65. One of the few benefits of growing old, tax breaks. The South African Revenue Service (SARS) gives you a tax break on lump sums you withdraw at retirement. You can read more about this here.

Tax on equities

Here we have to split the tax rules in two. Firstly, there is a tax on dividends which is taxed at a flat rate of 20%. The dividend yield on ETFs is about 2%. If you are drawing down 4%, you will need to sell down another 2% of your holdings. On this, you will pay Capital Gains Tax (CGT).

Calculating CGT is a bit trickier. First, you determine the base cost, which is the average cost paid for each share. You subtract this cost from the price you sell the shares at. This is the capital gain. Then you subtract R40 000 from the capital gains, which is your tax break. You will pay income tax on 40% (inclusion rate) of the remainder.

Just in case you don’t speak tax, let’s do an example. You sell down R200 000 worth of shares. For these shares, you paid R100 000 for the shares, so your capital gain is R100 000. You then get a tax break of R40 000 and you need to pay tax on 40% of the remainder. In other words, 40% of R60 000, which is R24 000. This R24 000 is then added to your taxable income. Just in case you did not notice, you will pay minimal tax on capital gains.

Tax on real estate investment trusts

Real Estate Investment Trusts (REITs) pay at least 90% of their income back to investors as dividends. As a result, the dividend yield is high, often ranging between 7 and 10%. By paying 90% of their income out as dividends, these trusts avoid paying corporate tax, but the investor pays income tax on the dividends. If you are drawing down 4%, all of this will probably come from dividends. If you do need to sell off any of your REITs, you will pay CGT on the profit.

Tax on property rental income

Income from property is added to your income tax. However, there are costs that can be subtracted from this income. Deductible costs include interest charged on your bond, rates, taxes, levies, maintenance and advertising costs. These will vary greatly depending on how long you have been paying off the property and the age of the building.

Tax on cash investments

If you invest money in a bank, you will pay tax on the interest earned. This interest is subject to income tax and is taxed at your marginal rate. There is also a tax exemption on the interest. For retirees over 65, this exemption is R34 500 and will not increase significantly.

Tax-Free Savings Account

In a TFSA you do not pay tax on dividends, security transfers or capital gains. The only exception is dividends earned from foreign companies, which will still be taxed.

There is a limit to the amount of income you can get from TFSAs. This is because of the cap on the money you can invest in this way. If you invest the maximum in this account and let it grow until retirement, it should be worth about R5 mil in today’s money by 65. So using the 4% rule, you can realistically expect to draw R16 666 per month from this account, tax-free.

Optimised retirement tax calculator

The retirement tax calculator allows you to specify the desired income from your investments and what percentage of the income comes from each source. The calculator then calculates your effective tax rate.

The next step is to optimise the effective tax rate for my desired income of R40 k. This was done using the excel solver tool. The only limitation is that the income from the TFSA should not exceed R16 666. By using the solver, the effective tax rate on R40 k during retirement can be brought down from 5.8% to 2.6%. I went ahead and optimised the effective tax rate for a few different incomes. The optimal asset allocation is seen below.

Graph showing optimised retirement tax calculator

This shows a few interesting things. As expected, you want as much money in your TFSA as possible. Then it also shows that low-income earners will pay less tax if a large portion of their salary is coming from an RA. However, as your required income increases, it becomes more tax efficient to receive your income from equities. This is the result of the income tax on the RA increasing above the 20% dividend tax from equities at higher drawdowns.

One thing that we often forget, is that a small portion of your income can always come from cash investments. This doubles as your emergency fund. Lastly, it is evident that you can still have some money in REITs but it should not make up the bulk of your portfolio if you want to be tax efficient in retirement.

Effective tax rate

Now let’s look at how much tax you will be paying at each income bracket.

IncomeEffective tax
R10 0000.0%
R20 0000.0%
R30 0000.1%
R40 0002.6%
R50 0004.2%
R60 0005.4%

If you require an income of R30 000 or less, you should be able to do it tax-free. We also note that even at a higher income of R60 000, the effective tax is still low at 5.4%. So if you invested in the wrong asset classes, how bad can tax in retirement be?

Worst case tax in retirement

For this thought experiment, I assumed that I contributed the maximum amount to my TFSA. At a required income of R40 000, the worst effective tax I will pay is 7.3%. This is only 4.7% more than the best-case scenario. To put this into perspective, if your investment fees are 0.25%, it will affect your retirement income by more than 4.7%. Investing for optimal returns is more important than worrying about tax in retirement.

So to summarise, tax in retirement is chilled. If you invested as much as possible into your TFSA, you really can’t screw this up too much. Use the retirement tax calculator to get a rough idea of what your tax will be in retirement. Obviously, this article only looked at optimising the retirement tax calculator and does not account for performance leading up to retirement and it does not include tax breaks from RAs.

All it shows is that even if your investments are a clusterfuck, your tax will not be more than 10% in retirement. If you max out your TFSA, your only goal with other investments should be maximising the performance. The tax won’t be a major factor. Especially for people that do not require an income of more than R30 000 per month in retirement. Better yet, max out your TFSA, your wife’s TFSA and all your kid’s TSFA and stop worrying about tax in retirement.

Be safe out there,


Quote of the week

ā€œ[Tax] is too difficult for a mathematician. It takes a philosopher.ā€ – Albert Einstein Click To Tweet


Thank you for reading to the end. Apparently, the average person spends 8 seconds on a page, so you are special. If you have any suggestions, feel free to drop me a mail on the contact page. If I missed anything or you have questions, don’t hesitate to comment below. I might even notice it and respond. If you enjoyed this article and really want to throw me a bone, please share it.

Lastly, if you want to be bombarded with emails known as the newsletter I send out once a month (if I remember), please subscribe on the right. There are also links to my Twitter and Facebook pages on the right (or at the bottom if you are browsing with a phone). All information is based on my opinion and you can read more about this in the legal disclaimer.


  1. Maurits

    Came across your blog today and enjoyed the simplicity with which you explain a complex subject! Thanks also for the spreadsheets.

    1. Post
    1. Post
      Hendrik Brand

      Sorry William, I see your comment slipped through the cracks. Thank you so much, I really appreciate the feedback.

  2. Pingback: Financial independence - May 2019 - Tigers on a Golden Leash

  3. John

    Interesting topic and nice to see some optimisation early enough to do something about it. I suspect you can get much higher tax rates than 10% in retirement if things are not optimised. For example, my Mom has a lot of living annuity income, which is taxed as income. At R40k per month, her effective tax rate would be something like 25.5% (using 2018 tax tables), with a marginal tax rate of 36%. Ouch!

    Just a comment on the graph; some of the optimisation looks inconsistent. For example, the cash portion is tax free up to the exemption on interest each year. There is a clear trend in the cash column for R30k, R50k and R60k but the value for the R40k seems to be some sort of default? I assume this means there are multiple ways of achieving a 0% tax rate within the optimiser, so any will do? At any rate, it’s comforting to see what low rates can be achieved.

    1. Post
      Hendrik Brand

      Thanks John,

      Like you said it can be much higher if you don’t make it part of your consideration early on. As long as you have a portion in a TFSA, you should be fine.

      You are right, it does look odd with the dip in cash investments at R40 000. It looks like the model starts prioritising the R40 000 tax exemption from capital gains tax around that mark. So like you correctly stated it is simply that there is more than one way to get that portion of the income to 0%.

      Thank you for reading.

Leave a Reply

Your email address will not be published. Required fields are marked *