I am 48 and am considering resigning after 26 years under a pension fund scheme with about R2 million saved. Is there an investment that can give at least R30 000 a month to survive my current debts?
Answer: First, one needs to ask if R30 000 a month or R360 000 a year is sustainable off R2 million. You would need interest and/or growth of 18% per annum if you want to preserve the capital. This is unlikely. You will also have to increase your withdrawal rate each year due to inflation. With inflation at 6% and a drawdown rate of 18%, your R2 million will only last six years.
Given you are 48-years-old, a sustainable withdrawal rate would be between 1.4% and 3.5%, giving you just R5 833 a month. Citadel Group says prudent withdrawal limits per age should be 1.4% to 3.3% at 45 years, 1.4%-3.5% at 50, 1.6%-3.8% at 55, 1.9%-4.3% at 60, 2.3%-4.9% at 65, 2.7%-5.8% at 70, 4.5%-8.6% at 80 and 6%-9.1% at 85.
The rules of your pension scheme should be reviewed to see if it allows early retirement before 55. If so, you can take out R500 000 tax free and rising in brackets from 18% to 36%, depending on the size of withdrawals above that. You are required to invest the remaining capital in a guaranteed annuity from an insurer that will pay a fixed sum every month, determined by age, interest rates and any annual increases you may want.
Your other option is to invest the remaining two-thirds in an investment-linked living annuity. You can nominate your income each year between the withdrawal limits of 2.5% and 17.5% per annum. This income is taxable. Please bear in mind that if you choose to withdraw your income at the maximum of 17.5% and your investment doesn’t generate growth of the same or more, your capital will become depleted and your returns will be lower.
Should you not be able to retire early, the first R25 000 is tax free with escalating charges from 18% to 36% for larger lump sums. So, you could end up paying nearly R600 000 tax on R2 million. You should sit down with a financial adviser to devise a financial plan suitable to your circumstances. While the 18% per annum you require to meet your income needs at present may seem high, your situation could, in fact, be better than you think. You may be able to easily pay off your debts and so reduce your monthly expenses by making simple lifestyle choices.
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