I went on early retirement at the end of April and have R500 000 available to me. I wish to have a monthly income of R5 000 or more if possible from this lump sum. How can I invest it?
The most important decision to take when structuring your investment portfolio at retirement will be the investment strategy and asset allocation followed.
This is imperative because, at retirement, your portfolio will need to earn a sufficient return to outperform inflation and meet your income needs while ensuring your capital will last as long as possible. This applies to any investment that you require an income from.
A well-diversified portfolio consists of all the asset classes combined. Cash and bonds will be providing your short-term income and can help to ensure your portfolio is resilient against stock market movements in the short to medium term (one to five years). The longer-term strategy of a portfolio will consist of growth assets. This includes property, and local and offshore equity exposure.
The expected average return or aim of a portfolio like this will be to reach CPI + 6% per annum to CPI +7% per annum over the long term (six years +). Yes, there will be years when your return can be much higher, but lower return cycles will also happen.
Our recommendation for a portfolio earning this type of average return would be to try not to draw more than 5% of the portfolio value in annual income. The reason for this is that you ideally need to plan for inflation as well as your income withdrawals.
We also need to plan for your entire retirement lifespan. Depending on your age this can still be a possible 30- or 40-year term.
Drawing an income of R5 000 from a R500 000 lump sum equates to an income withdrawal of 12%. At this level, it is unlikely that your portfolio will outperform the combined impact of inflation and income withdrawal. One of the biggest risks we have when retiring is that we will outlive our pensions.
Essentially this means you will unfortunately deplete your capital amount quite quickly.
My recommendation would be to either:
- Consider working longer to ensure you have a higher fund value saved up for retirement.
- You will need to earn some form of additional income while in retirement.
- You will need to draw a lower income.
I would recommend consulting a financial advisor and planning carefully for your retirement future to ensure you will have sufficient provision in place to meet your requirements.