I am 60 years old; my pensionable age is 65. I would like to retire at end April 2018 at age 61. My pension is currently at R5.7 million. My monthly expenses are approximately R20 000 per month. Will I be OK to retire next year, take the R500 000 tax free and invest the balance with 4% monthly as an income?
Peter Nurcombe-Thorne - Rosebank Wealth Group (Pty) Ltd
This is a difficult question to answer without fully understanding your personal set of circumstances, needs and objectives and I would strongly encourage you to engage with a financial planner before you make any decision.
I would normally encourage clients to carry on working until they are at least 65, to ensure that they maximise their retirement savings by taking advantage of the compounding effect in the years when their retirement capital is at its largest.
To put this into perspective, if you were able to delay retirement by an additional two years and your pension was to grow by 8% per annum, you would have an additional R950 000 in your living annuity without factoring in the additional contributions that you could make. This additional capital will obviously make your retirement picture more comfortable.
Additionally, once they decide to leave the working world, many retirees find it difficult to get back into it, which means you need to consult with your financial planner to carefully analyse your ability to provide for your retirement when you take this decision.
Having said that, many clients have to face ill health, retrenchment or redundancy and are forced to retire earlier than would be recommended.
I would suggest that taking the R500 000 tax free is a good idea, as it’s always wise to have an emergency pool of funds set aside to cater for any unexpected expenses that life may throw at you. I would not advise drawing down on these funds to supplement your income, as you can only change your living annuity draw-down rate once a year at the anniversary date and therefore having this cash available might come in handy down the line.
You have specifically requested a drawdown rate of 4%. However I would like to alert you to the fact that according to figures released by the Association for Savings and Investment South Africa (Asisa), between 2011 and 2016 average drawdowns ranged between 6.44% and 6.99%. These drawdown levels were not due to high-living retirees, but the higher-than-inflation price increases of basic necessities such as electricity, medical scheme premiums and food.
Our second scenario below therefore assumes a drawdown of 8% to illustrate the effects of a high inflationary environment.
Secondly, it’s the norm to assume an equity growth rate of between 7% and 8% and a total portfolio growth rate of CPI + 5%. But I would like to point out that for the last ten years, real returns (post inflation) of Regulation 28 asset allocation funds have been far short of these levels; they have been closer to 2%.
I have presented three scenarios based on different assumptions below. These should give you an indication on how sustainable your retirement might be, based on the information you provided us.
Scenario 1 – Base case
If we assume that you are drawing 4% from your living annuity (R208 000) and that the living annuity is able to grow at 8% per annum and you escalate your draw by 6% per year, your capital will be depleted in 33 years, as can be seen from the graph below.
Scenario 2 – Inflated income draw escalation
If we assume that the variables mentioned above stay constant, but your draw has to escalate by 8% because of higher-than-anticipated medical and other lifestyle inflation, your funds will be completely depleted in 25 years.
Scenario 3 – Reduced income draw escalation
If you are able to keep your expenses under control and only increase your draw by 5% per annum, your capital will last in excess of 42 years.
While the scenarios above show that you could retire should you wish to, they clearly paint very divergent pictures based on simply moving your annual escalation percentage around and it goes without saying that missing the return target would be detrimental to your retirement.
As I mentioned previously, I would strongly advise you to see a reputable financial planner so that you can make the correct decision with the help of a person who has all the available information. By reputable financial planner I mean someone who will charge you for advice and not products and who openly discloses all the fees you will be charged including their own.
I hope you have found this useful and good luck as you enter a new and exciting part of your life!
To read more about Peter’s views on retirement challenges, click here.