What can I invest R158k in to receive R5k income monthly?

Of three options on what to do with your RA funds, a life annuity would give you the highest probability of income certainty – but not at the required level.

I am 61 years and would like to withdraw my funds from a retirement annuity (RA). The current value is R158 000. I have no dependants and would like to receive a regular income of around R5 000 per month for life until I pass on. My current RA issuer mentioned that I would not incur any penalties. I need advice regarding the best place to put away these funds to generate interest that would get me R5 000 per month. Between a living annuity, unit trust, and exchange-traded funds (ETFs), which one would be best, as the banks’ interest rates are just peanuts?

Stephen Katzenellenbogen - NFB Private Wealth Management

Thanks for your question. I’m going to start by addressing your options at retirement and then move on to the income requirement.

When you retire from an RA, you can take up to one-third in cash, and the remaining balance goes toward purchasing either a life or living annuity. In your case, you have another option: you could commute 100% of your RA as it is below the minimum provision of R247 500.

To help you make a decision I’m also going to give you a brief explanation of how life and living annuities differ, and outline a third option.

Living annuity vs life annuity

A living annuity is where you invest a cash lump sum and then select an income drawdown percentage of between 2.5% and 17.5% per annum. You can change this income drawdown percentage – but only once a year on the investment’s anniversary date – giving you the flexibility to draw a higher income if needed. You can choose an income frequency of monthly, bi-annually, quarterly or annually.

A life annuity differs in that it secures you a predetermined monthly income until the day you die. Again, you invest a cash lump sum, and the life insurance company then takes on the obligation to pay you an income for the rest of your life. The payment may be a fixed amount or inflation-linked.

Living annuity

We typically favour a living annuity as it gives the investor the most flexibility in terms of choosing the underlying funds and provides for variable income options.

However, living annuities are most suitable for low-income needs – in relative terms (in other words, income as a percentage of the capital amount).

At R5 000 per month, your income requirement sits at R60 000 annually, which is far above the maximum income level allowed. On the capital amount of R158 000, the maximum annual income drawdown percentage of 17.5% would be R27 650, or roughly R2 300 per month.

Bear in mind that R5 000 per month means you would be drawing approximately 38% of your capital annually.

Even if the selected funds perform well (10% per annum), you will be eroding your capital materially, thereby shortening the investment duration. Therefore, if your income level is not materially adjustable, to say a ±5% drawdown, a living annuity would not be an appropriate option.

To get an income of R5 000 per month (using the 17.5% annual withdrawal limit), you would need to put away a capital amount of R343 000 into the living annuity. And at a 17.5% drawdown rate, your income would drop dramatically as the years go on.

Life annuity

The alternative to a living annuity is a life annuity, in which case you fund the annuity with a lump-sum payment. The issuer then makes regular payments to you for the rest of your life.

However, given the capital amount and the fact that you are only 61 years of age, the income you would receive from a life annuity will be materially lower than R5 000. On a fixed, single-life annuity, with no guaranteed term and no annual increase, your monthly income (assuming a R158 000 lump-sum investment) would be approximately R1 464 per month until death.

To get the desired income level of R5 000 per month for the rest of your life, you would need to invest around R523 000 as a lump sum.

A third option

A third option could be to commute the entire RA as a lump sum.

Current legislation permits you to withdraw your full RA as a lump sum provided the value is less than R247 500. Therefore, you could withdraw the entire amount (tax-free) and not have to transfer it to an annuity. You can then use the proceeds to supplement your income requirements.

To reiterate, even with a good return on investment (more than 10% per annum), your income needs of R5 000 per month will erode your capital quickly.

In conclusion

Unfortunately, the product choice cannot solve your high income-requirement relative to your available capital.

Of the three options outlined above, the life annuity gives the highest probability of income certainty, although not at the required level.

In closing, I would like to wish you good luck, and I hope this answer has given you some direction and options regarding your retirement assets.

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I always question if these questions come from a real person or made up by an advisor to do the advertorial. However if this is a real person they are not going to any of the investments mentioned above and are going to go “invest” in an MTI Global or the like because they will give them the answer they are looking for.

The reason I question if the person is real is that this is NOT rocket science to work out that their demands of return are irrational.

I share your sentiment.

What is funny is that the comments on these articles are normally far more helpfull than the advisor’s answer – and the reason I scroll right down to it after reading the question.

Plus – far less long winded.

Thanks for your comment. The questions are absolutely real; they get submitted to Moneyweb who then reach out for responses. I would guess Moneyweb receive loads of questions and can only address
a handful.

mrjones, although I cannot confirm that this is a real person. Let me tell you, being an adviser myself, I get this type of requests all the time. It seems that the majority of our population are financially illiterate and think that you can purchase an income with barely any capital. More so clients think that R500 a month towards pension savings is enough to secure their retirement and unfortunately that is just not the case(in most situations). In my opinion the problem will only get worse because Finance is not a subject being taught at school and most parents don`t know anything about it either. Finance needs to be an compulsory school subject for all learners!

Thanks for the feedback. So after Stephens reply it seems it is an actual person and from you it seems to be a very common question.

However still hard to believe that these “investors” believe such a return exists, if so the professionals would all be gazzzillionaires.

If my son came to me for advice as far as finances are concerned I will tell him about not putting all his eggs in one basket and about putting some of his money abroad and ETFs and equities. And in the end I will still send him to a good advisor with a little input from my side because if things go wrong like a 2008 or like a Covid 19 he will blame me for the terrible advice.

Other than cryptocurrency arbitrage as discussed earlier this week on moneyweb the only other answer is to earn an income. At 61 the questioner is hardly old or needing retirement.

He must have some skill that could be turned into an income opportunity. The big question though is can the R158k be successfully used to provide equipment etc that would be required to generate the income. Being a hairdresser and buying a hairdryer and a pair of scissors and working from home may make better returns than any RA?

Maybe going for Crypto on your own is a possibility, but that depends on individual personality to handle the stress, plus the determination to put in the effort, patience, time it requires to understand how these things work. I’ve being doing crypto on my own for a few years now, and it ain’t easy, despite all the lovely, wonderful stories being marketed one hears day in and day out about how you can become rich overnight, how many people becone rich. True, it does happen more often than usual, but the number of people it happens to is far fewer than we made to believe, in contrast to the many who have lost big time, even everything. It’s possible, but if you think you going to hit it big quickly similar to the lovely success stories you hear, chances are you setting yourself up to get wrecked, big time. Who knows maybe you will be lucky like some are, but the odds are heavy in favour of one being wrecked big time if you don’t know what you are doing. But it’s possible to make huge returns on your own with effort, patience and proper risk management.

I have submitted a question and have received an answer.

Now onto the case with the author of the question –
I had a mid life crisis or whatever you want to call it, at around ±30, I read a money web article on the cost of medical aid in retirement and realised I was way off target.

this question sounds like they did not have that “crisis” moment I had many years ago and sadly are trying to make ends meet now.

check the stats on retirement it is scary out there.

The only option I see available is that the person learns how to trade stocks on the JSE. I’m only 35 now and have recently got into the trading of stocks due to the Covid-19 situation as a part time hobby. When the market crashed and I saw the price on Sasol plunge I saw it as an amazing opportunity. I got more involved and managed to make a few good returns on investments. From Jul to Oct I managed 18%, Oct to Nov 11%, Nov to Dec 9% using an investment of R10 000 to R45 000.

Basically what I’m saying is that although using a professional to handle your money can guarantee you a return of 10%/year, don’t think you will not be able to out perform them by getting that same return on a monthly basis for your self. You just need to learn how to do it. With R160 000 Capital you would just need to look and find a trade in which you can make return on a monthly basis of 3% + 1.5% in Brooker fees.

The best opportunity right now is Banks which seem to have a high weekly/monthly ranges/cycles and are still expected to gain as the year goes on as they have yet to reach their pre Covid levels. Just buy low and sell high.

Problem is, in normal years the bargains are harder to find and in general lower returns. You were lucky to buy when there were no short fall in bargains. Anybody can trade those. Get the same returns year in and year out over a 10/20 year period – then we can talk. Warren Buffet did 20% per year since starting, so if you can get the returns you are talking about you’ll be a billionaire in no time

Andrevan, Congratulations on your gains and for taking the steps you have taken that most people never do. However from my viewpoint there is one big difference here is he is 61 and you are 35 and from what it sounds like it will be catastrophic for him whilst you still can recover. Also if decisions are made under such pressure (for him) most likely these will be bad decisions.

Also to add to Lord Beerus, another problem is that the longer you are in the game the more likely you will encounter some bad luck (read – The Black Swan by Nassim Taleb and some of his other titles, plenty of stories in there of how a lot of Wall Street Pro’s get caught out and did not see it coming).

I have to agree, to me that sounds like gambling. Sure you can go in with R10 000 and walk out with R45000 and claim it to be the best way to grow capital BUT please repeat the performance year after year and then we talk. Buying shares at a bargain price is great if you have capital available but it can go horribly wrong to and normally equities should be seen as long term investments.

Be very wary of terminology – there are 2 types of persons who operate over the JSE – those that buy and sell infrequently and who are seen by the taxman as investors over a long horizon; and those who trade – the second operation has substantial implications if SARS see you as a trader as the tax implications could be significant. Also if SARS deem you a trader it is almost impossible to get them to see you as an investor

I would have suggested Krion, but they seem to be in liquidation…..

Stephen, I’m keen to know where you are able to source a fixed annuity yielding a return of over 11%?

Hi Stephen, please respond to Red John re above query? I’m also keen to know where u get >11%. Realistically its half that. Plse revert?

It is a compulsory life annuity quoted on the basis of a single life (male aged 61), no guaranteed term, no annual increases and no fee. The fee (maximum 1.5%+VAT) doesn’t impact the rate too much so a rate with the fee wouldn’t drop much vs the article. The long term bond rates are high at the moment which makes these annuity rates very compelling in the right circumstances.

If he has any health issues he could also look at an impaired life life annuity with slightly higher returns.
I wish the market offered more competition and options with regard to life annuities. I am still waiting for deferred life annuities in SA – something that I can buy with a monthly contribution while still working or with a lump sum at retirement that offers me a CPI linked income from age 75 or 80 and absolutely zero if I don’t make it to that age to keep the product cheap. That could take away a lot of stress.

Stephen – this was your opportunity to become a legend!!! Even bushiri would have marvelled at the miracle that was needed to solve this investor’s challenge!!

Jah neh. Mr Jones is spot on about irrational returns.

This makes pensioners and the retired vulnerable to scams.

Crypto is tempting to them but now I cannot keep track of all the crypto stuff out there. There is a new product every now and then.

It always amazes me how much stick the responders to these questions get. By deinfition you cannot be specific becasue the regulator requires you to have a lot more information before you provide advice so it is necessary for these answers are vague and all encompassing (waffling).

I wonder what the response would have been if Stephen had simply said “Nothing. There is no single investment which will deliver on your requirement with any more certainty than a game of russian roulette.”

Yeah unless you want to venture into private lending. The required IRR is 38% and one thing I can think of that would get that is debt factoring. However I’m not sure there will be massive uptake.

End of comments.



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