Mark asks: I’m going to inherit about R600 000 next year. With my retirement not far off, what is the best way to invest it?
Maya replies: Having a boost to your retirement savings is a real bonus. The rule of thumb is that a lump sum usually doubles every five years if invested in a growth asset. So by not spending this money and putting it towards your retirement, you will have more than R2-million to add to your retirement fund in 10 years’ time.
Linda Sherlock, head of FPC Consulting at Alexander Forbes, says the decision on where to invest this money needs to form part of your overall retirement planning. And there are several questions you need to ask first:
When will I need this money?
How far are you from retirement? Will you need this money on retirement to provide income or can you leave it to grow and supplement your retirement funds 10 years into retirement?
Short term: Sherlock says if your time horizon to retirement is short and you will be using this capital in retirement to supplement your income almost immediately, the investment vehicle needs to be selected on the basis of that shorter time horizon, taking into consideration the income vehicle you would be using for your retirement assets.
Long term: If you only need the funds later, you can invest the money in a portfolio that carries some equity (shares) to give it the opportunity to grow. However, you would need to get advice on what portfolio to invest in and to consider phasing the money into the market over a period of time.
Do you need capital on retirement?
Many people need access to capital to replace a vehicle or create an emergency fund. These funds may provide that capital, especially if the rest of your retirement funding is tied up in annuities.
Are you carrying any debt by way of a bond into retirement?
It would then make sense to pay off this debt before you retire using a portion of your inheritance.
Having a plan in place
As you are around 10 years from retirement use this cash injection as an opportunity to sit down with an accredited financial planner who will help you create a retirement plan. You need to understand where you are now financially in order to make an informed decision about how best to use this R600 000 to boost your retirement.
A starting point is to calculate what your current retirement savings would provide you on retirement and to create a post-retirement budget, which must include the extra costs like post-retirement medical aid increases.
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