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How can I invest R2.5m in such a way that it’s all gone when I die?

And how much can I draw down from this investment?

I am 80 and my wife is 79. We have R2.5 million cash to use as a drawdown in addition to our total pension of R25 000 pm after tax. How much can I draw and how should we invest it such that it’s all gone when we expire? Say in 12 years? Interest is low nowadays, but/and inflation seems to be rising. 

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Dear reader,

Welcome to a well-deserved phase of your life! I believe this is a wonderful phase of life. We are meant to live life to the fullest, and enjoy a good break after many years of hard work.

I’m not sure how the existing pension is invested/structured or the strategy you are currently earning an income from, and these will be important to take into account as part of a holistic advice process.

I would advise investing the R2.5 million in a voluntary vehicle (so that it is accessible, as I assume these are already post-tax funds based on your question). From here, the drawdown is best determined by the investment strategy.

Following the PSG Wealth retirement investment philosophy, our advice will be to try to draw an income of not more than 5% of fund value. You will be unlikely to deplete the fund value using this strategy, and basically living off the returns for most of your investment term.

Based on the amount of R2.5 million, a 5% drawdown will equate to an additional amount of roughly R10 400 pm. Your drawdown percentage will be determined by many variables – firstly, your own income requirement.

Then, of course, the timeline of your expected retirement term, which none of us has the answer to; longevity is one of the planning challenges we are dealing with.

But when it comes to leaving a legacy – that remains a personal choice.

You are allowed to adjust your retirement income planning to earn a higher income rather than leaving funds behind to support the next generation. If the funds are invested in a voluntary/flexible type of vehicle, you are allowed to make changes to your income withdrawals at any point.

Interest earned on cash is low at the moment due to the current interest rate environment – not only in SA but globally. The current annual effective yield of the PSG Wealth Enhanced Interest Fund is 4.47% (as at September 14, 2021), compared to 6.55% in September 2020. Interest rates are currently expected to only start increasing again in the second quarter of 2022 (depending on a variety of factors).

Our advice when it comes to an investment portfolio is to follow a diversified approach. This means we diversify your strategy in two different ways.

Firstly, by diversifying with fund managers and essentially including various investment styles. By following a multi-manager approach you diversify – among others – between different styles, strategies and sectors, and when it comes to the offshore component, demographies, currencies and economies as well.

Secondly, a successful retirement strategy is based on exactly that – strategy. Diversifying among asset classes will be essential. This strategy ensures that any short-term requirement is allocated in cash/bonds or a combination of both, ensuring a decent return (better than being just in cash in the bank in certain circumstances, read ‘current interest rate environment’). Your monthly income will therefore be coming from cash and bond-based funds, reducing volatility and ensuring a consistent income (lower return, but consistent). After that, the growth asset component is extremely important.

The ultimate strategy when it comes to retirement is ensuring you can outlive your funds – and this means outperforming inflation, as well as your income withdrawal needs. To be able to achieve this, there will need to be an equity-based component to the overall strategy within your investment portfolio, that will help you achieve above-inflation returns over a long-term period.

This strategy will need to be managed and reviewed at least annually – perhaps more often depending on your income withdrawal. I recommend working with a wealth advisor to structure this for you, who can also advise on rebalancing as required, as there may be unwanted tax implications that need to be planned for.

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

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Two guaranteed options:

1. Leave it in your bank account; it will gradually get less. Just let someone monitor it after your passing as the bank will charge you an admin fee for managing a zero balance.
2. Donate it to cANCer (if you want to let it disappear fast).

If you want it to be all gone when you expire why not get a life annuity. At that age you will get a massive monthly income I am sure.

I have no idea how much but will be interesting if someone can do an estimate.

Definitely the best option.
This is normally based on the 10 year bond yield rate which is attractive at the moment. I have the following figures from Feb 2021.

Female 71 years of age.
Capital available R3.5m
5% escalating pension R23-25k from 3 different insurers.

The answer is to spend 17361 per month plus the monthly income earned after providing for tax every month. (2 500 000 divide by 144 months) And if you still alive then you have very good memories. Enjoy.

“ensuring you can outlive your funds” ??
What kind of advice is this?

It’s difficult to a know when you or your partner will actually die. A 79 year old female could live another +20 years meaning inflation will be a major risk, especially for medical care costs. Drawing 5% from your capital (as recommended by Elke) would be sustainable and wise as you don’t want to deplete your capital early. Perhaps bequeathing any legacy to a charity is an option to look into.

Not sure why a voluntary life annuity wasn’t suggested. It’s perfect. Guaranteed income for life and at that age the income will be significant and you don’t have longevity risk.

Just keep some funds for estate costs…unless you really want the heirs to pay after your death.

“not sure why a voluntary life annuity wasn’t suggested” .
Reason – Many Certified Financial Planners are just in it for living annuity commisions. This is criminal. Just google what Suze Orman says as well .
General comment -With many South Africans short of retirement funds the 4 or 5 % rule for living annuities will not work hence life annuities are a great option.

It can easily be calculated with parameters, provided the reader can supply his exact planned date of death.

I also suggest to set some money aside for possible ‘execution’ services, in case it may appear that one day you may overshoot the timing of your planned date of death. So that your plan can be err…well executed (pardon the pun) 😉

Add this inclusion into your Last Will & Testament, to avoid Police investigation.

Conversely, if your health deteriorates faster & it looks like you may not reach your planned “date of death”, this would be detrimental to your financial plan, as it will usually involve astronomical costs of hospitalization/theatre/doctors’ bills.

Hence more preferable to aim to overshoot your planned “DoD”, as the cost of a single .22LR cartridge to “execute” your plan, is minimal.

End of comments.

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