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.
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.