Bobby says: I’m 31 years old and want to retire in 10 years. I want to have a passive income that will provide R60 000. I haven’t saved anything yet but I have started investing in unit trusts and could save up to R2 000 a month.
Maya replies: I am guessing that this question relates to the article I wrote on how to be a millionaire by 30. The problem is that even R1-million is not enough to retire on, especially when you are only 40 years old. This is because of inflation.
For example, if you invested R1-million in a money market fund you could probably receive 6% interest or R60 000 a year (ignoring the fact that you will have to pay tax on this). However, we have an inflation rate of 6%, which means that living expenses go up by 6% every year. Therefore next year you would need R63 600 to buy the same lifestyle. At that rate of inflation, within 10 years you would need R100 000 of income to buy the same lifestyle. You will simply run out of money within 16 years.
The only way to keep up with inflation is to invest in a growth asset like shares (companies listed on the JSE) or property that provides rental.
Shares pay out dividends, which is a percentage of the earnings of the company that is paid to investors. As earnings grow so this dividend increases, keeping pace with inflation. I saw a great graph recently, which showed that R100 invested in the market in 1960 would today be paying the investor an annual dividend of R800 — that is not even taking the value of the share itself into account.
Dividend yields (dividend paid expressed as a percentage of the share price) are around 3% to 4%. That means you would need to have saved about R1,8-million to provide a dividend income of R60 000 per year. Assuming that your unit trust investment grew on average at 10% a year and you contributed R2 000 a month, it would take just more than 20 years to reach this target.
If the markets produce higher returns, for example 15% per year, then you would reach that target within 17 years. So you would have to invest in an aggressive unit trust that was fully invested in equities (shares) and hope that the market returns improved.
You could also look at buying a property that would provide a rental income of R5 000 a month. As you would be able to increase the rental by inflation each year this income would keep its buying power. You would need to first build up a lump sum to put down a deposit of at least 20% as the banks are a bit sticky at the moment about lending for investment properties.
How soon you would meet your target would depend on the value of the property, and the rental you would receive from it would first need to be used to pay off the bond on the property. A good website to check out is www.hope.co.za.
While having a goal is a brilliant way to start your financial planning, retiring so early would be very difficult and quite frankly you would get very bored! Perhaps reframe your goal not to retire but to start a second career by the age of 45. A career or business that taps into your passion and something you want to do for the rest of your life. Your savings will allow you to make those choices.
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