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The reality of retirement

Reader’s questions answered.

CAPE TOWN In this advice column Robin Gibson from Harvard House answers a question from a reader who only has ten years to save up for retirement.

Q: I am 56 years old, healthy, have a reasonable job and presume I can work for the next 10 years.

I have a home which is worth about R2.5 million, with a relatively small bond. However, apart from an annuity worth about R300 000 I have no other savings.

My youngest child is almost independent, and in a couple of months time I will be able to save R10 000 per month. This amount can increase to R20 000 in the next 18 months.

How should I invest this money and how much trouble am I in?

The really important question here is the last one. In our view, any investor currently requires approximately R1 million for every R4 200 of monthly income they want before tax and after costs.

This yield is specifically constructed to provide an escalating income that keeps up with inflation. We are aware that an investor can source a fixed yield that is higher, but that would mean that it doesn’t increase in the future and progressively becomes worth less.

This also assumes that your capital will be maintained and over occasional periods will grow faster than inflation. This is important, because if you don’t have to use up your capital, how long you live and how long you need an income for become inconsequential. You could live beyond 100 and still have a secure income.

This is obviously the optimum position.

The next important question is then what to invest in to give you the best chance of building a retirement pot. The table below will demonstrate a value in today’s money of what your savings could be worth in ten years’ time. This is based on 18 months of investing R10 000 and then 102 months of putting aside R20 000 per month.

Investment Return

Value in Current Purchasing Power

Inflation + 3%

R 2,557,618

Inflation + 5%

R 2,820,599

Inflation + 8%

R 3,283,603


When looking at this table you have to consider that there are two key drivers that affect the investment return.

The first is cost. It may seem intuitive but it is amazing how investors are so easily duped. Costs reduce returns, and the higher the costs, the bigger their impact.

Where investors are usually fooled is that they are led to believe that their provider is somehow 25% to 30% better than the rest over a longer period. We are not so sure anyone can consistently claim that. There are good value options out there, so be cost conscious.

The second consideration is your choice of asset class. Investors hate volatility, but growth assets come with volatility. As a result, most dilute their returns with stabilising asset classes that have no track record of beating inflation over longer periods.

If you want to achieve returns of well above inflation, you therefore have to be prepared to live with short-term volatility. That means investing in products that predominantly hold growth assets such as equity and listed property.

Finally, something the reader has not specified is their expectations in retirement. Probably the biggest hurdle we face with individuals about to retire, is that they want to continue their current lifestyle with very limited resources.

In this particular instance, you should consider the possibility of downscaling and modifying your lifestyle to unlock the capital in your home. This will both provide more capital and potentially lower your required income.

If we use the example above and assume that you do successfully build up R3.2 million, your retirement fund grows to R425 000 (in today’s money), and that you downsize and release a sum of R500 000 from the property, then your wealth pool would be around R4.125 million. We could therefore advise taking an income of R17 325 per month before tax as prudent.

That is probably the highest sustainable income you are currently looking at when you enter retirement.

Robin Gibson CFP ® is a director of Harvard House Investment Management in Howick.

If you have any questions you would like answered by financial planning experts, please send them to

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At last someone who is capable of talking about numbers, before the possible scenarios. With specific numbers being suggested (that can be debated).
I like. How refreshing.
But I’m sure there’s more… Can this case be built upon?

Yes, there is more. This article doesn’t address the tax deductibility of contributions to a retirement annuity which effectively increases the amount which can be contributed, eg R10,000pm could translate into a contribution of R15,385 less, for instance, 35% marginal tax. Up to 27.5% of taxable income is deductible. If his present retirement annuity is the old-fashioned type then he should start a unit trust based one.

Should he pay more than 27.5%, the excess contributions will be carried forward until such time as he is no longer contributing and will also grow tax-free. At that point the tax credits will be applied to his income until such time as the full credit has been used. The other option is that the excess will increase the amount that he can take out tax-free upon retirement. Since he has children, he may well prefer the second option in that he could take a guaranteed annuity with the rest to secure a significant potion of his income, while using just the income/part income from the tax-free income maintaining the capital as a future bequest to his children in addition to his home. Another option if he exceeds his tax deductibilty is to start a TFSA.

The only possible obstacle to grossing up his monthly contributions would be the cash flow problem if his employer’s payroll system is not set up to cater for the tax deductions on a monthly basis, although they should be able to handle this. If they aren’t, then he just contributes the lower amount and pays his tax refund into his his retirement annuity.

“while using just the income/part income from the tax-free income”

Correction – should be “while using just the income/part income from the tax-free lump sum”.

Always great responses from you Wendy.

Bravo! An answer that is as comprehensive as what the somewhat vague problem statement allows.

The other CFPs that waffle along given situations like this can learn a lot from Robin’s response.

Hear hear. At last a real question from someone who probably is real too!

10 years… lets say downscale from that home to a 1 mil place and his investments did really well and his R300 000 did well too, he’d have just over 6 million I’d guess. Would give about R20 000 per month. In 10 years time R20 000 will have been eroded by inflation somewhat.

Brilliantly written article.
Good, practical advice

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