CAPE TOWN – In this advice column Mikayla Collins from NFB Private Wealth answers a question from a reader who needs advice on investing in retirement.
Q: I am retiring within the next 3 months and would like to ask advice in my situation. I am 70 years old and have R900 000 to invest. It is currently in a money market fund earning interest of approximately 7.25%.
I have no dependants, my townhouse is paid for, my car is paid for and I have no debt. I just have my monthly expenses which are rates, electricity, levy and living expenses.
As I am retiring soon, I need to invest this amount, probably split into two different portfolios – one to generate an income and one to grow the capital over the long term. I don’t want to submit to a ‘pension’ fund as such as that would also attract charges each month which I cannot afford. I want to invest most of this lump sum myself as I cannot afford to attract any extra fees each month being paid to an investment adviser.
I would welcome your reply as to your suggestions and identifying a few funds which would give me what I am looking for or any alternative suggestions.
Also, at my age what taxes would I be liable for when investing in a fund to draw from?
From your question it is clear that you are aware of the need to grow your capital as well as provide income. Most people aim only to maximize their income, forgetting about the long term effects of inflation, and the fact that some growth is needed over and above the income they are taking. People who do not take note of this, end up drawing down on their capital and running out of money later on.
As far as income is concerned, you should be looking at income funds, which invest only in cash, government and corporate bonds and listed property. They allow you to have access to the returns provided by government and corporate bonds, but still have access to your money should you need it.
Income is the primary focus, so these funds will not invest in equity and the income you receive should be quite stable. The top ten income funds have produced between 8% and 10% in a very low interest rate environment, where banks would have given you around 5% to 7%.
Choosing funds for growth is more likely to be where you may struggle and if you don’t want to pay adviser fees you are going to have to do a lot of research yourself. We cannot under any circumstances recommend funds to you without knowing your specific needs and constraints and your willingness and ability to accept risk and volatility.
This is not only in terms of local regulations, but also international ethical and professional standards. The question you ask may seem simple but even in trying to put together a few simple tips, there is a lot more to it than just recommending a few funds.
However, here are some basic guidelines:
Stick to the asset managers you know. They are well known for a reason and usually it is because they are consistent in performance. If you refer to their websites, the information is quite easy to find. Get a few fact sheets for the funds you are interested in and compare them to each other.
Start by comparing the returns – not just over one year but three, five and ten years. If you are presented with two funds with similar returns, you should then choose the one with the lower risk or volatility.
Common mistakes that people make are either to put all their money into the last year’s top performing fund, or else to choose too many funds because they are not confident, and end up just earning an average. You should choose two or three funds for each of your objectives and make sure you look at their long term performance. Last year’s top performers could very likely be at the bottom of the list this year, so try to combine funds that don’t just mirror each other.
Fact sheets have to state returns net of fees so don’t necessarily let high fees chase you away. Where there are performance fees, however, make sure an appropriate benchmark is being used.
In terms of your growth objective, think about foreign versus local assets and how much of your portfolio you want to have in equity. Foreign assets will produce the most growth in a period where the rand is weakening, but they also expose you to additional currency risk rather than just the risk related to the asset itself.
If you want growth, you will have to have a substantial portion of this investment in equity. Compare local equity and multi-asset funds with global rand denominated funds, and that should give you an idea of what to expect.
As far as tax is concerned, if you invest directly in unit trust funds, then 15% withholding tax will be applied to dividends, and any interest above R34 500 will be taxed as income. You will however still have your primary rebate of R20 664. Capital gains tax would apply to any units sold.
Given the amount you are investing, it is unlikely that your monthly income withdrawals would put you in a position to be liable for income tax. Large lump sum withdrawals may attract tax if the applicable gains have been substantial enough, but this would be assessed on a case-by-case basis, depending on the rand amount of the withdrawal, and how much of that is a capital gain.
Mikayla Collins is a private wealth manager with NFB Private Wealth Management in Cape Town.
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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