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How can I invest R15m to get a monthly income of R50k?

Retirement planning isn't something that can be done once; it's an individual investment discipline that considers the relevant facts on an ongoing basis.

I am 61 years and would like to withdraw my funds from a retirement annuity. The current amount is R15 800 000. I have no dependants and would like to receive an income of around R50 000 per month for life until I pass on. I need advice regarding the best place to put away these funds to generate interest that would get me R50 000 per month. 

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Dear Reader,

Thank you for your question and congratulations on reaching this milestone. The information available in your question is relatively restricted, so it would always be best to approach a certified financial planning professional to ensure that your individual financial planning needs are addressed.

Context

I have to start by pointing out that retiring at age 61 might sound ideal, and you may have personal or health reasons for making this decision.

There is however a chance that individuals might live up to age 100, therefore retirement planning needs to be done to this age.

This means that the objective is to provide a retirement income from available resources for 30-39 years, which is a daunting task and an awfully long time. Under those circumstances, I would advise clients to draw less than 4% of their retirement capital per annum.

It should also be stated that even starting off below 4% and staying there for as long as possible, longevity risks (retirement capital depletion) still exist, and a guaranteed life annuity has to make up part of the retirement options considered as an appropriate income annuity solution.

You make no mention of a spouse. The age difference between spouses, together with the fact that statistically women live longer than men, could still add to the already great longevity risk of your investment choice.

As your retirement capital has accumulated and is currently in a retirement annuity, you can choose a post-retirement income annuity vehicle (governed/approved under the Long-term Insurance Act 52 of 1998).

Lump-sum withdrawal option

A maximum one-third lump sum withdrawal is available to you on retirement. The below lump-sum taxes will however apply (cumulatively, with all other previous withdrawals stated below). Deciding how much to take as a lump sum could be considered against the accompanying tax implications, but is best demonstrated by a proper retirement projection which calculates the correct discretionary investment amount.

Taxable lump sum benefits Rates of tax
R1 – 500 000 0% of taxable income
R500 001 – 700 000 18% of taxable income above R500 000
R700 001 – 1 050 000 R36 000 + 27% of taxable income above R700 000
R1 050 001 and above R130 500 + 36% of taxable income above R1 050 000

Only the following lump-sum withdrawals must be taken into account for tax purposes:

Retirement lump sums after October 1, 2007, withdrawals after March 1, 2009, and severance benefits after March 1, 2011.

Life annuity

Life annuities are the only financial instrument that fully transfers the retirement market and longevity risk to a long-term insurer. There are various contract options available, for example, “joint life”, “guaranteed payment period” (income for a set period, even if the annuitant dies), “capital preservation” (payback at death), income escalation rate, and so on. These options will determine the annuity income offered from each respective life insurer based on the life insured age.

Most annuity rates are competitive in the market (they insure the same risk), so if one quote is materially better than another, make sure you understand why. The younger the individual, the lower the initial income amount guaranteed as it foresees more annuity income payments compared to someone older. The more contract options chosen (for example, joint life, capital preservation, 10% income escalation), the lower the initial annuity income offered. When the annuitant passes away outside of any guaranteed term, the investment capital used to purchase the life annuity is forfeited.

Third-party living annuity

This retirement instrument is governed under the Long-term Insurance Act 52 of 1998. It is a compulsory annuity which allows you to decide on the investment allocation, income drawdown (2.5-17.5% pa) and the fact that one can nominate beneficiaries to the remaining capital. This can provide immediate liquidity to surviving spouses/heirs/nominated beneficiaries at the death of the annuitant.

Together with the freedom that this retirement vehicle enjoys, comes far-reaching consequences to longevity- and investment risk management. Asset allocation has to be managed in accordance with the short-, medium- and long-term return objectives of the portfolio. Cash and fixed interest instruments are conservative and listed equities as growth/aggressive asset classes respectively. Your investment return will be dependent on your asset allocation and fund selection and is not guaranteed.

The question on how long one’s retirement provision in a living annuity can be expected to last is dependent on the following considerations:

  1. Withdrawal (draw-down) rate;
  2. Asset allocation;
  3. Return on investments;
  4. Finance charges/costs; and
  5. The life expectancy of the annuitant.

The table below provides a good foundation to manage asset class selection/portfolio management in living annuities:

The amount you require is R600 000 per annum, which is approx. 3.8% (pre-tax) of your capital per annum. If you require a monthly drawdown that covers living expenses of R50 000, the pre-tax drawdown requirement per current tax tables (ignoring other that primary tax exemption) jumps to R850 000 per annum (or 5.3% per annum). This withdrawal rate implies a high probability that you will run out of money over the next 30 years.

The Asisa-approved living annuity income withdrawal guideline is provided below. The drawdown rate refers to a pre-tax income withdrawal percentage at inception. Investment return per the table below indicates investment returns after all fees (and tax).

Annual income rate selected at inception  Investment return per annum (before inflation & after all fees)
Percentage 2.5% 5% 7.5% 10% 12.5%
2.5% 21 30 50 50 50
5% 11 14 19 33 50
7.5% 6 8 10 13 22
10% 4 5 6 7 9
12.5% 2 3 3 4 5
15% 1 1 2 2 2
17.5% 1 1 1 1 1

Hybrid living annuities

I find hybrid living annuities transparent and predictable. Hybrid living annuities are in essence a combination of a guaranteed life- and living annuity, which provides greater certainty for individuals that have substantial longevity risk (retiring early/great health record). Extra certainty always comes at a price as investment capital is given up to buy a guaranteed annuity component (either initially or after inception), as part of the combined solution. Some new generation insurers use medical underwriting to predict a more accurate life expectancy of the annuitant. By doing so they are able to offer the annuitant a higher annuity income at inception.

Sequence risk

Living annuities carry market sequence risk as part of the investment solution. Sequence risk signifies the risk an investor carries of not reaching their financial planning objectives, due to the unpredictable market movements (going down), soon after initial investment/retirement. Exchange-traded funds (ETFs/passives) increase sequence risk as they offer less protection (when compared to actively managed portfolios) during falling markets. I prefer ETFs in pre-retirement solutions.

Conclusion

Retirement planning is not a once-off or ‘one-size-fits-all’ but an individual investment discipline that considers the relevant set of facts, on an ongoing basis. Each of the three post-retirement vehicles mentioned above has amazing benefits, as well as sometimes lesser-known restrictions. It is therefore difficult to formulate a retirement strategy from a “reader’s question” as various factors should be considered. Lastly, never retire without a thorough retirement projection.

Do you have any questions you would like answered by registered financial planners?

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what would the fees be on keeping it on something as simple as the low cost ETFs you would use to accumulate to this point? If it is <0.4% to accumulate, what is the annuity fee?

FNB Money maximiser will do that easy. R15.8Mill @ 3.5%

Or buy some BTI shares at R554, they pay R12 every quarter.

Maybe cheap resource shares.

Maybe also some financial (OMU, SBK) shares after they drop on the 3rd Covid-19 wave.

Buy some KIO (last dividends were R41) or AGL shares….you get dividends twice a year and with 15m, you can get more than 50k. month….easily. (15m/585 = ~25600 x R41_KIO div) = +1m and you get another dividend payout. you might not always get R41 a share(even if you half the price to R20 you would still get a chunk of money), but KIO is a very good share and in high demand for their quality ore they produce.
Besides, why pay someone else to handle your money?

I would not go for OMU, as i believe the company is not a good return on investment. The share price is almost stuck between 12-15(if you lucky) for a very long time

If is perfect for OMU to move between R12 and R15.
I usually buy at R12.7 and sell R14.50 and it works repeatedly,
(I buy a few volumes)

Just get 10 properties at R1.3M each (The R200K for transfer costs and renovations/maintenance). Rent it out For around R9k – R11K each (this is the normal rate in Johannesburg Northern suburbs. Automatically this will increase in somewhat proportion with inflation.

Don’t trust financial advisors. They are usually poor people trying to make a living of obtaining rich clients.. Trust a rich person

Agree with the part of “advisors”, but have you ever worked with tenants before?

Best is to get the tenants details for their place of work and close family members… should they give problems then embarrass them at their place of work

Lol. Dogmoodley has a good idea, granted, but I’ve had plenty of experience with residential tenants…

And when it goes wrong it costs you big time. Legal fees, damaged property, repainting, stealing things like satellite dishes and much, much more.

I once had to clean all the snot off the walls that a tenants child had so kindly left behind. Still makes me cringe.

Would you trust a rich advisor that told you that the above was a bad idea?:)

He can only draw one third cash LESS TAX from an RA. The balance has to buy some sort of annuity.

This response dedicates a lot of words to a Living Annuity when the reader stated they do not have any dependants – surely, life annuities deserved more space?

My two cents:
I doubt that you will find many individuals with R15m willing to give that up for a guaranteed income stream for life. Due to the accompanied risk/consideration accompanying living annuities, necessitated a thorough explanation. My take was “no dependants” does not mean someone don’t want to leave a financial legacy. I might want to leave something for my kids/their kids/a NPC, although they can be financial independent from me. I am neutral on all three mentioned retirement solutions and use all three as appropriate.

Life annuities are great when markets are high and interest rates are high – as you essentially moving a higher capital amount into a high yielding annuity. At this stage, interest rates are anything but high, and if you need to ensure you achieve a real return, then an underlying equity solution is your best bet long term.

Ultimately the client has enough capital. R600K pa. is 3.79% of capital, add 4% for inflation, and he needs to achieve 7.79% after fees. You can thus work on a diversified portfolio and manage sequence risk. If interest rates do spike (think March 2020 when yields hit 13%) then you can lock in a portion to a life annuity – as most LA’s now have that hybrid option.

These rates are garbage

These articles never mention the vital question of income management. The most important rule of retirement is NEVER draw down the full extent of the income available to you. Most people do. I retired at age 54. I am now 74 and for the last 20 years I have never used more than 70% of the TOTAL income available to me. This gives me the ability ride out rough patches when market dynamics change

Open a company, open a fixed deposit. Get 7-9% p.a., get the interest paid monthly or quarterly, pay yourself a salary, pay you expenses out the business, pay a small tax on what’s left at the end of the year. Job done.

Why invest and risk it?

Just leave as is in a Money Market or Money Maximizer account and spend as you normally do, plus enjoy it.

R 15.8 Million will probably outlast you.

Keep in mind that the interest earned via such is fully taxable. The client would earn 1.92% p.a. net of tax. You’re also not accounting for inflation each year, the income requirement increases by at least inflation each year to keep the purchasing power of his income relevant. Interest rates are the lowest they’ve been in ages. The money would also form part of the client’s estate. Money markets are not without risk etc etc etc

I have seen this strategy play out many times in the town where I live. A farmer retires and sells his property for what amounts to R20 million in today’s purchasing power to investest it in an interest-bearing instrument like a savings account. He is the wealthiest man in town for the first 5 years. After 20 years he is forced to apply for the social grant as inflation destroyed the purchasing power of his savings.

Inflation is the stealth tax that supports government expenditure and vote-buying projects. The salaries of government employees rise with inflation, while the purchasing power after taxes of savings account does not.

This implies that a long-term investment in an interest-bearing instrument actually subsidizes the lifestyle of a government employee. Think about that for a while.

Sensei it is so true what you are saying about the people in the rural areas. I knew a person who worked for the municipality in a small town. When he decided to retire I asked him what is he going to do with his pay out and other benefits he replied he was going to put all of it in a money market. I was so shocked that anyone could be so careless with their life’s earnings. That was at a time that almost all LA’s were earning not less than 10%.
Had he still lived he would have run out of money and his home by now.

The US Dollar will be on the rebound- higher US rates into 2023 – the US Money printing is over (40 % M1 rise over the last 12 months – inflation will kick in Mega).

The ZAR will weaken a bit from these levels – its a very good time to buy Dollar/Rand at these levels and invest is some top European and US Stoxx(electric motor car manufacturers).

Glacier by Sanlam, methinks the best call to help you with both rand hedged-and un-hedged offshore products!

Sell toilet rolls to Eskom ?

Invest in Vanguards S&P500 ETF if you’re not sure.

For me, I’m younger so can risk a little more.
60% stocks
20% etf’s
20% Crypto

oh and I invest a whopping 0% in South African companies… gave that up a long time ago

I’m pretty sure I missed any “actual answer” in exchange for a lecture on the typical financial planning speech that benefits the industry and advisors…

I see no answer to the actual question.

What’s wrong with fixed income and higher dividend yielding ETFs for e.g.?

Do all the above except put 10% in AutoFarm; R1.5m yields approximately R100k pm.

Draw R50k and AutoFarm automatically capitalises the rest to grow your investment well beyond inflation impact.

Weren’t you telling us a few days ago that the ront was heading to ten to the mighty dollar or has Jerome already changed your mind.

It would be foolish to peg a single amount per month (R50k) for the rest of your life, to be more realistic you should factor in an inflationary amount at least annually. With an optimistic inflation rate of 4% after 20 years you’d be needing double (over R100k) to maintain your standard of living.

61 with no defendants…why do you need R50k per month? Are you renting?
Take some money, buy a place.
This should save at least R10k per month (today’s money) forever.
Spend another R250k and get off the grid. That should save you another R2k electricity costs (today’s money) forever.
You have enough money, you need to watch inflation.
Buy two or three bitcoin and forget about it.
Buy some shares that produce good dividends and put some money in a fixed deposit – careful of the taxman – too much interest is not great.

End of comments.

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