I am semi-retired and earn an income of about R35 000 through properties. I have R700 000 in unit trusts. I need to draw additional income. Please advise where to invest the R700 000?
With regards to the additional income that you want to draw, you can schedule this income directly from the unit trust account. You can therefore leave the R700 000 in the unit trusts as it is – you don’t have to necessarily move it to another investment account or product.
You might just trigger costs by putting the funds in a new product and you might trigger capital gains tax, if you sell out of the current funds.
A discretionary investment unit trust account caters for regular monthly withdrawals.
You now have to decide what is a safe amount to withdraw, especially if you don’t want to tap into your capital. I would suggest taking a regular withdrawal of between 4% and 5% of the capital amount. Four percent would be the safer option: if you take 4% from R700 000 it will give you a monthly income of R2 333.
You also have to determine if the underlying unit trust funds that you are currently holding are a suitable investment to draw an income from.
You don’t necessarily want to withdraw regularly from an equity-only unit trust fund. When markets go down and you take income from a high-risk instrument, it’ll be like a double-edged sword. Your money will have to grow so much more to make up for the negative growth and for the income that was taken out.
In the challenging economic times that we are now in, it would make sense to take the regular withdrawal from a stable asset class. A good guideline is therefore to put two to three years’ income in a money market unit trust or a low-risk income unit trust. You then schedule the income from the low-risk fund. After the three-year period, the money in that account will be depleted and you just top it up with your remaining funds.
In the industry we call this the ‘bucket approach’: the income portion will be in a ‘low-risk bucket’, a portion of the funds in a ‘medium-risk bucket’ and the remaining funds, in a ‘long-term bucket’.
You will further have to evaluate which unit trusts you want to use in your medium- and long-term bucket. You say you are semi-retired: that to a certain extent puts you in a lower-risk category. With the funds in your medium- and long-term bucket, you will have to bring in some growth assets. In today’s uncertain times, it is good to have some offshore market exposure, not only local market exposure. Your risk appetite will determine which unit trust funds will be selected. There is a whole range from low-risk to high-risk unit trust funds; the amount of local and offshore equity in the unit trust funds will determine in which risk category it falls.
Another fact you have to consider is that most (if not all) of your income is dependent on one asset class: physical property.
You have to be careful not to put all your eggs in one basket. It is always good to follow a diversified approach – especially with post-retirement monies.
The main drawback of physical property is that your money is locked up in bricks and mortar – there’s no liquidity. You don’t want to be in a situation where all your liquid funds get used up by your day-to-day and unforeseen expenses. Then you will be in a situation where you will be forced to sell property. Rather downscale on some of your physical property while you still can, and invest the proceeds in instruments that offer more liquidity.
Lastly, if all of this sounds too overwhelming for you or you feel totally clueless, rope in the help of a financial advisor; he or she will be happy to assist.