Question: I am 73 and recently retired. My wife is 80. We are withdrawing R37 500 per month from our equity portfolio of R4.2 million that is handled by my investment adviser. What is frightening me is that at the rate our investment is going down we won’t have anything left in a few years time. My financial adviser says all will be well after three years, but that seems like too much risk to me. Currently we save R20 000 every month, with R400 000 put away.
Answer: Assuming an inflation rate of 6%, your rands will lose almost half of their purchasing power in 10 years. If your “personal inflation” is higher, you need your income to grow faster. Only equities and listed property, historically, can do this. Property and equities have two distinct aspects of their return.
The first one is income in the form of taxable distributions for property, and dividends from equity; and the second is capital growth. Income can still be there even when capital value drops. A property can lose value, but the tenant still pays his rent. A blend of listed equity could buy you a dividend yield of between 3% and 4.5% per annum.
A listed property portfolio could generate 7% per annum. So, if your monthly income was generated solely from these yields, you’ll sleep easier. Your current income required: R37 500 per month. Current Capital Available: R4.2 million. Therefore your income yield required = 10.714%. Your required yield still exceeds yields on all asset classes, so it would appear your fears about capital depreciation are well founded.
But you are saving R20 000 month and have a pool of emergency cash. Assuming your portfolio has 70% equity and 30% property with fees of 1.75% a year: Your 70% Equity provides R102 900 per annum at 3.5% yield. Your 30% Property provides R88 200 per annum at 7% yield. That gives a combined income of R191 100 per year.
If you subtract costs of R73 500, that leaves a net income of R117 600, or R9 800 per month. This income can be paid across into your savings. If your R400 000 is then invested in the money market at 5.5% interest and the income from your equity portfolio tops it up, this would provide an income for 60 months, or five years, at R17 500 per month before it drew down to zero.
In the meantime, your portfolio has to produce capital growth of 1.82% per annum to rebuild to R4.6 million, or at 7.83% per annum to take it up to what would be an inflation-adjusted equivalent.