I want to find out what lump sum amount I need to invest to receive a monthly income over 10 years of R10 000. The income should start paying out immediately. After 10 years, the initial amount should still be available.
Drawing an income from an investment, and preserving the capital, is mainly based on the investment approach you choose.
When it comes to any income-generating investment, a well-diversified approach is advised. The short-term approach is ensuring a low volatility environment when it comes to the actual income earned (cash and bonds).
Together with that, the more important part of the strategy is ensuring you have exposure to growth assets, in the form of equities, the asset class most likely to outperform inflation – and, more importantly, your income drawings – over the longer term. Although not guaranteed, this approach can help to ensure your capital lasts for years.
Referring back to your question – the amount you need to invest will depend on what the source of funds is (as the tax implication will differ depending on the source). If the funds are coming from a retirement fund for example (pension, provident fund or retirement annuity), income tax will apply, and you will essentially need a higher investment value to invest to ensure the R10 000 per month net income.
If you are referring to a voluntary investment vehicle (already post-tax funds), our advice would be to withdraw an income of 5% of fund value. With the appropriate investment strategy, you will be earning a long-term income and not depleting the capital amount.
You will need roughly R2.4 million to invest, assuming a 5% withdrawal (R10 000 per month).
This is for the initial withdrawal requirement of R10 000 per month.
If invested according to the strategy advised, capital growth can be expected and essentially your 5% income drawing will become more than R10 000 per month as the capital component will increase over time.
The 5% withdrawal will form part of a portfolio where we are expecting long-term returns of the consumer price index (CPI) plus 6% or CPI+7% – and therefore your withdrawal is unlikely to deplete the capital as the portfolio is still outperforming the withdrawal rate over a long-term period.