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How do I invest for a R20 000 monthly income?

Three of the biggest risks someone close to, or at retirement faces: longevity, inflation, and the underlying investment assets.

How much would one need to invest to generate an income of R20 000 pm over 20 years?

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This is a very general question that I will make a couple of assumptions on:

I’m going to assume the reader will need: R20 000 per month (pm) after tax. I will therefore work on gross figure of R25 000 per month income required, in other words R300 000 per annum. After deducting income tax, it will give the reader R20 977 per month after tax, therefore slightly more than the desired income amount. I’ve only taken the primary income tax rebate into account. If the person is older than 65, he/she will receive a bigger annual income tax rebate.

Whether the capital should be depleted or untouched after a 20-year period is important. I will answer both scenarios.

To receive an after-tax income of R20 000 pm, the starting capital you would need in today’s terms would be R8.5 million. I’ve made the following assumptions: capital will grow at 6% pa after retirement. The R25 000pm, gross income, will cater for a 6% inflation increase every year. We are currently in difficult market conditions, but given long-term growth trends for equities, we should get 7% to 8% from investments with a reasonable amount of equity exposure.

If we get better growth – for example 10%, the picture would be a lot different. At the end of the term, ie 20 years – assuming 6% growth, a 6% withdrawal increase every year and a R25 000 income – the capital will be roughly R8.6 million. I can say with reasonable certainty that we will get better than 6% growth and therefore better results at the end.

I’m assuming the reader doesn’t need the capital to be intact after 20 years. To receive an after-tax income of R20 000 pm, the starting capital you would need in today’s terms would be R5.7 million. After 20 years, capital will be depleted. I’ve made the following assumptions: capital will grow at 6% pa after retirement. The R25 000 pm, gross income, will have a 6% inflation increase every year, assuming again a very low growth scenario.

At a recent presentation by Allan Gray, it identified the following as three of the biggest risks someone close to, or at retirement is currently facing:

  • longevity
  • inflation, and
  • the underlying investment assets.

I fully agree with this statement from Allan Gray.

If I unpack this: 1) Longevity is a big threat to capital. Retirees have to make an assumption that they will live 30 years after retirement. 2) Inflation: South Africa has a high inflation rate – the long-term average is at least 6%. 3) Underlying investments – one of the biggest risks retirees are facing is placing their investments in much-too-conservative assets. It’s very important to give the capital exposure to growth assets – the recommendation is to have at least a 50% equity exposure. It is a big risk to have all your retirement funds in money market funds – the growth will not keep up with inflation.

According to Allan Gray, the average retired individual on Allan Gray’s books is taking a 7% per annum income. New statistics are showing that retirees should aim to take an income of 4% of capital in the starting years.

If I go back to the readers question, if he/she takes a R300 000 pa income (gross) from R8.5 million it works out as 3.50% as percentage of capital, which is a safe withdrawal rate.

  

ADVISOR PROFILE

Sonia du Plessis

Brenthurst Wealth

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The capital amount seems reasonable. Lots to evaluate post this number though in terms of asset allocation, the fees, and ensuring the capital lasts even if there is sequence of returns risk.

Easy according to financial advisors- you just save R50 000 or 40% of your monthly salary(whichever is the biggest) per month from age 6 or maybe latest 7, preferably with the advisors. And even then you may not make it.

Beauty Lulu. Made my day ! Its strange how many people do not grasp the magic effect of compound interest over time (the same way most folks don’t understand the effect of momentum and if its too good to be true, it probably isn’t). And yes, you don’t need to share your money with a “financial advisor” to be successful. Spend less than you earn, don’t borrow unless you have to (you cannot borrow yourself rich) and read up on your own. The knowledge is there for free on the internet. If you really want objective advice on money or insurance, do it on a for fee basis not a commission basis….. and then walk away. Always for fee.

The fee basis is a foreign concept to the financial products industry. Everything is still 99,9% commission-based AFAIK, no matter how it’s structured. So we’re dealing with SALES people, although there’s plenty advisors out there that will add true value, and have your best interests at heart (despite earning comm.)

I doubt if anyone would pay a FEE to a person selling a policy, as one would not see the immediate benefit (as opposed to paying a doctor, draftsman, tax accountant whereby the fee cost is easier evident where it goes). Perhaps a “call out” fee from financial advisors, similar to getting a plumber, electrician or IT tech to your premises…? 😉

OK, some fin advisors will tell us….surely you don’t pay your Doctor AFTER you recover, when using his prescription had desired effect? We pay our doctor before/during consultation…

(So I tried this trick with my GP…he gave me a few websites & said “I can now go and learn to operate on myself”).

Now I have more respect for FinAdvisors…like the GP, it takes 6 years of studies + internship years, so the high commissions are justified.

@ Michael: Horses for courses, I guess Mike. My perspective in North American, spent most of my adult life here. Here you can pay someone for an objective assessment of your finances, get an opinion, pay and leave….. don’t get me wrong I am happy to pay for objective, professional advice, I certainly don’t want it for free. To me the commissions on advice (especially in the insurance industry) are a perverse incentive. The man from, for instance, Old Mutual is going to sell you an Old Mutual policy regardless. An independent broker is much more sensible to my mind. As far as “the high commissions are justified” I don’t agree. I put up the capital, I take the risk and the agent gets his commission regardless of how my portfolio performs. Heads he wins, tails I loose. To each his own I suspect. And just to add, just like in medicine, I tend to get a second opinion very easily. Cheers.

Short answer : give a wealth manager / financial advisor R5m and they MIGHT manage to give you back R20k per month after fees, for about ten years. no guarantees though. Past performance is no guarantee of future performance so it might be 8 years

5m only buys you 20 years left under the bed

Assuming that the response to the reader’s question is correct, it makes little sense saving such a large amount over your working life to obtain such a minute return. Frankly, any businessman will be smiling with glee to receive R8.7m and pay back R25000pm to the lender. The lender, on the other hand, should be extremely concerned about receiving such a small return on investment. Our savings model is not delivering to savers and this needs to be addressed urgently.

simple question… simple answer from a simple guy… Invest R3.1 million in a Nedbank fixed deposit acc at 7.69% Half in your name , half in your partners name to save tax…not that much at age 65.. earn R20K monthly… how long are you actually going to live? If needs be you can slowly draw from the 3.1 million and live comfortably till you pass …. no 3rd party fees… thats how i roll…

What about inflation? The real value of 20k will decrease over time. With the 4% rule, it’s designed to handle inflation increases….

“goldcreekinvestments” got the best option. How ever , save R5.7 mil. This will give you R20000 p/m @6% at a Bank , for at least 30 Years.

J

Something is not lekker here with the calculation. Take R8.5m, divide by R25k and you get 340 months or 28.3 years. Without any investment or inflation growth. So I score 8.3 years, i.e. 41.5%.

Surf over to 10x.co.za and use their retirement calculator instead. R47k per month with inflation increase for 20 years with an initial R8.5m investment. Alternatively, R25k per month with an annual inflation increase until age 110 if you retire at 60.

Try a different exercise.
Invest about 6.857 mil in a global equity unit trust but split the in investment with your spouse if you can trust her/him.
Assume a long term return of about 9.5% to 10.5% and inflation of say 6% per annum.
Draw a maximum of 3.5% p.a.
At that rate your investment should remain intact adjusted for inflation or even increase slightly.
Unlike an annuity the proceeds of which are fully taxable, your withdrawals will constitute CGT events even though they will add, after exclusions to your taxable income, remember that at least initially most of the withdrawal will be from capital.
If you and your spouse do not have other income, initially and for a long time if the income is split you would not reach the tax threshold.
If your investments performed minimally as expected you should have at least preserved your investment adjusted for inflation.

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