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How should I invest R1.2m for a monthly income at retirement?

I cannot take a lot of risk, as this is all the money I have.

I am 66 years of age and have a total amount of R1.2 million invested in the Nedbank Seniors Green Savers Bond. I have no other debt and own my own property. This is the only money I have with no other income. What is the best way to invest this to draw a monthly income from it until I am 90? I cannot take on a lot of risk as this is all the money I have.

My current savings gives me 8.6% yearly return but has no capital growth. I’m looking at keeping half the money in this account and putting the other half in something like Coronation Strategic income fund to get a better return. My current investment does not need to be intact at the age of 90. What is my best option to get the best monthly income without falling to far behind inflation? It is also very difficult to reinvest anything so assume no reinvestment.

Herman Klopper - Futurum Financial Group

  

It is common knowledge that most South Africans cannot afford to retire at the normal retirement age. In the end you must work with what you got, and the role of the financial planner has become increasingly important. I say this because it leads to out of the box thinking in terms of different ways to structure funds and carry out scenario planning for funds to last longer. The risk involved in scenario planning is that you’re betting on an outcome with a certain degree of probability. There are a lot of ways to manage this risk but a change in variables might affect the outcome in a big way.

We often forget that taking on too little risk is sometimes the biggest risk in a portfolio (retired or not). I am not sure what income you require each month but let’s work on the maximum drawdown for a period of 24 years.

Scenario 1

This scenario shows how much you will be able to draw if you leave all your capital in the Nedbank Seniors Bond. I assume this return is given after fees and taxes.

  • Income taken each month is R6 200 with an annual escalation of 5% to keep up with inflation.

  • Capital will be depleted after year 24 with market growth at 8.60%.

Scenario 2:

Invest R600 000 in your Nedbank Seniors Bond;
Invest the remaining R600 000 in the market with high equity exposure.

Your R600 000 in the Nedbank account should last about nine years and hopefully you get a return of 10% after fees and costs on the R600 000 invested in the market. After nine years you can invest the balance of your funds invested in the market back into the Nedbank account at 8.60% and take your drawdown for the remaining 15 years until age 90.

The weighted return over time is 9.30% and this will allow for a slightly higher drawdown to start with = R 6 650.

A final word:

  • Do you qualify for state pension?

  • Look at the option to sell your house and move into a smaller apartment or in a retirement complex and use the balance as part of your retirement capital.

  • If you have any children, try and live with them for a few years.

  • Remember that annual escalation in income can change the drawdown model significantly. In other words, take an increased drawdown only if it is necessary.

  • Revise your drawdown strategy each year with your financial planner.

  • Asset allocation will need to be managed if you plan on something like scenario 2.

  • Drawing the interest earned each month will also not last because of the effect of income escalation, unless you escalate your income by 1% a year over a period of 24 years.

  • The optimal tax position needs to be found to give you the highest income possible. Tax will not be that significant problem but do need to calculate to pay the absolute minimum if need be.

  

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