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How should pensioners invest?

Readers’ questions answered.

Cape Town – In this advice column Mikayla Collins from NFB Private Wealth Management answers questions from readers who have questions about investing money in retirement.

Q: My mother, who is 83 years old, still healthy and staying on her own in a retirement village, needs advice on where to invest R300 000. She needs to receive an extra income of about R1 500 per month to meet all her living expenses. She also needs to earn some growth for future unforeseen expenses like frail care, yearly raised costs on medical aid, levies and cost of living.

Put into simple terms, your mother’s requirements are:

1) Income of R1 500 per month, which equates to 6% per annum from her investment.

2) Capital growth in excess of her income requirement.

Considering the amount of money to be invested and the requirement for a fixed income, let us look at the options:

The most conservative would be a bank investment or savings account. However, current interest rates will not be enough to provide in excess of 6% per annum, so this would not be a viable choice.

A second consideration would be government bonds, which would provide a fixed income currently between 7.25% and 8.25% per annum. Inflation-linked rates are much lower and would not meet her 6% per annum income requirement.

While investing in government bonds would be a safe way to ensure that she receives her income, there are three disadvantages. Firstly, there would be liquidity restrictions on her funds once invested. Secondly, there would be no capital growth, and finally her income would not be linked to inflation. So while R1 500 a month may be enough for her now, five years down the line the buying power of this amount would be far lower.

It’s also worth mentioning that there are investments being advertised that offer fixed incomes higher than government bonds, but you should be aware of the risk involved with these. Many of them are backed by unsecured lending and because your mother is relying on this income, the risk in the majority of these investments is likely to be too high.

My preferred option would be a unit trust investment in fixed income and/or low equity multi asset funds. These should allow your mother her 6% per annum income requirement, which could also be adjusted for inflation each year, as well as some capital growth.

Fixed income funds offer exposure to a diversified range of cash instruments, preference shares, property and bonds. Multi asset funds will also include some equity. Both will allow her to make withdrawals at any time.

Although they offer the best potential returns, the downside of unit trust funds are the fees charged and that your mother would also have to accept some level of risk. Returns are not guaranteed and could, at times, be less than the 6% she requires for a short period.

However, these unit trust funds are designed to beat bank deposits net of fees and those with a long track record show that they do. This is the option that will give your mother the most diversification, therefore minimising her risk, especially if she spreads the investment over more than one fund.

Finally, your mother could consider a share portfolio consisting primarily of high dividend paying stocks, preference shares and listed property. However, in all likelihood the yield would not cover her 6% per annum income requirement after fees and she would be relying on some capital growth. It would also be less diversified than the above unit trust fund option.

Q: I would appreciate your advice on how to manage an inheritance. There are three people involved, being our mother of 88 and her two daughters. My mother had life rights, which have been set aside.

We will be receiving approximately R1.5 million from the sale of property. Mostly this money will be divided between the daughters, however we would need to keep some of it aside for easy access to cover expenses for our aging mom as needed. Obviously, growth is a big factor, short and long term.

We would much appreciate your opinion as to where and how to invest the money.

In my opinion, it would be best to split the inheritance from the start, so that each portion can be managed according to the specific requirements and objectives for that amount.

Your mom’s investment will need to be more cautiously invested because the expected investment term is shorter and she may need to access the funds suddenly and possibly in large amounts. I would suggest that you agree on an amount that you would be comfortable to set aside for your mom and invest this in cautious unit trust funds that can be accessed at any time and with no penalties.

Each daughter can then invest according to her own risk tolerance, investment term and objectives.

You mentioned that growth is a big factor. Along with the opportunity for growth comes risk, so your individual tolerance for risk will be important.

Assuming you do not foresee yourselves needing to access the investment in the near future and you would be willing to tolerate a reasonable level of risk, you could consider a share portfolio or equity unit trust funds for maximum growth. This is entirely dependent on your personal constraints though and any investment advice provided would depend on that.

Mikayla Collins is a Private Wealth Manager with NFB Private Wealth Management.

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