Q:I’m a 61-year-old widower and plan to retire at the end of this year. My current pension value is R4 122 906.10. If I invest my money in a living annuity and require R20 000 per month, how long will my money last?
Sonia du Plessis - Brenthurst Wealth
Thank you for your question. Please note as we haven’t done a full needs analysis the advice I can offer will deal specifically with an income requirement of R20 000 monthly and will not take into account the need for any other ad hoc withdrawals. Ideally other assets, liabilities, other sources of income and access to any lump sums are some of the questions which should also be taken into account in order to answer your question holistically. Your tolerance towards risk, your short- and long-term goals, any family members dependent on you, are also important personal circumstances which should be taken into consideration. These combined factors will determine the risk most appropriate for your personal circumstances and ultimately determine the portfolio construction for your living annuity.
Once an appropriate level of risk has been determined the investment portfolio constructed on your behalf should reflect this level of risk. The performance of your living annuity will therefore be linked to the appropriate level of risk and your personal needs which is the income you require.
As you are now 61 years old, which is considered young due to increased longevity, and with the limited information provided, I have assumed that you have no liabilities or dependents and as such would be able to take on a moderate degree of risk.
If you do not have any other sources of discretionary capital you may need to consider withdrawing a lump sum to give you some liquidity and transfer the balance to a living annuity to draw your income.
At retirement of your pension you should be able to draw 1/3 as a lump sum of which up to a maximum of R500 000 could be tax free as long as you have not withdrawn any lump sums from retirement funding previously.
Any lump sum amount over and above R500 000 will have tax consequences. However for the purpose of your query we will assume that you have adequate discretionary funding and will be transferring the full amount to a living annuity.
If I assume that you require R20 000 before tax, you would net R17 444 monthly and pay approximately +/-R2 556 in income tax. Using R240 000 per annum on an asset base of R4 122 000, is an income percentage of 5.8%. With inflation currently over 6% and considering your young age you need to grow your capital above inflation and after withdrawal. This means you would need to achieve a growth rate of more than 11% per annum. This has become particularly difficult in the current low-growth environment. As a general rule of thumb we suggest an income withdrawal of 5% or below, but in the current economic environment below 5% would be preferable.
This will ensure you preserve your capital in a lower-return environment and grow your capital over and above your withdrawal level. Rising inflation however remains a concern in a low-return environment, but over longer periods historical returns have beaten inflation which should be monitored on an ongoing basis. Assuming a worst case scenario of 6% growth and 4% withdrawal increase per year, your funds will most likely last 20-25 years – then the capital will be depleted. Markets will however improve at some point as they move in cycles which should result in better returns in future years, which will improve your cashflow projection of your portfolio. We suggest this is monitored on at least an annual basis.
The other alternative, especially if this is your only source of retirement capital would be to consider a traditional or life annuity whereby you will receive a guaranteed income for the remainder of your lifetime which can accommodate inflationary or annual increases. It is worthwhile receiving quotes for a traditional life annuity and to compare this to the risks and benefits of a living annuity and determine which is more suitable for your personal circumstances.
As there are many factors to consider I would strongly suggest you contact a financial planner, who can review your personal circumstances holistically and provide you with all of the above options to make an informed decision. You’ve worked very hard to build up this capital, and want to make sure your capital will provide an income for the remainder of your lifetime. You also need to be fully aware of the benefits and restrictions of both a living annuity and traditional life annuity and which product will be more beneficial for you. It is very important to review your financial plan every year with your financial planner to ensure any circumstantial changes are taken into consideration and to ensure you will have sufficient funding for the remainder of your lifetime.
All the best, I wish you a successful retirement.