In this advice column Roenica Tyson from Glacier by Sanlam answers a question from a reader who wants to know how much money he needs to secure his income in retirement.
Q: How much cash is needed to get a monthly income of R7 000, and where should one invest it to achieve that goal? I am 71 years old, and do not wish to deal in equities. I have a large cash amount invested in fixed deposits, but the return is not so great.
To calculate the amount of capital you need to generate your required level of income, there are two factors that have to be considered: the period for which the income is needed, and the return the investment would generate.
A cash investment such as your fixed deposits, on average, earn a real return (return above inflation) of 1% over market cycles. To earn a monthly income of R7 000 that increases with inflation each year for 11 years, you would need a capital amount of about R824 000 in this type of investment.
This calculation however assumes that the full amount is used to provide income and no capital would be left. In other words, you would run the risk of out-living your money.
If you wished to preserve your capital and live only off the interest, that figure changes substantially. You would then need an amount of over R8 million if you never wanted to eat into the real value of your capital.
The 11 year period assumed in these calculations is based on the average life expectancy of a male aged 71. For a female investor this would be slightly higher, at 13 years. As this is an average, some investors would have a longer, and others a shorter, life expectancy. To avoid the risk of outliving your capital, it would therefore be ideal to have a larger capital amount to invest.
Another key consideration is around the need for inflation protection. The calculation above considers that the required R7 000 monthly income keeps pace with inflation assumed at 6%. However you need to determine what your personal inflation rate is.
We have seen price increases in food, electricity, and medical services in particular, exceed the overall inflation basket in recent years. You therefore need to ask whether the purchasing power of your income will be sufficient to cover your increasing expenses.
When looking at investment options you also need to explore your ability and willingness to take risk. If you are averse to taking equity risk, there are various fixed-income unit trust investments that may suit your risk profile. These funds have flexible mandates and invest in a combination of long- and short-dated debt instruments, including bonds, inflation-linked bonds, cash, and sometimes even some listed property or foreign exposure. Returns are typically more attractive than your fixed deposits and aim to produce stable income while preserving capital.
The returns of such funds are, however, not guaranteed and if you want absolute certainty about your income, a voluntary life annuity may be the best vehicle. As a 71 year old male it would cost R980 000 to purchase a R7 000 monthly income, increasing by 6% each year, for the remainder of your life from Sanlam. This rate will vary depending on age, gender and prevailing interest rates, and other providers will also have different pricing.
While you will not take on any market risk with this option, you are still exposed to inflation risk and no capital can be left to your heirs after your death. If you want to guarantee the income for a period, you can opt to purchase a term-certain annuity which will pay to your dependants for a fixed period – even after your death. To secure this income for 10 years would cost an additional R100 000.
We always recommend speaking to a qualified financial advisor who can consider all your financial needs and assist with a suitable solution to achieve your goals.
Roenica Tyson is a product manager at Glacier by Sanlam.
If you have any questions you would like answered by financial planning experts, please send them to firstname.lastname@example.org.
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