Mail & Guardian
Mail & Guardian

Advice on my retirement plans

3 min read

Philip asks: I would like some advice regarding retirement plans. I am still working at the age of 68 and saving in an investment builder which is due to mature in 2013 with a value of about R1,5-million. Where should I invest this money to give a steady income? I will have a pension from my company of R7 000.

Maya replies: It sounds to me like you are invested in an endowment not a retirement annuity. This would mean that you have discretion on where to invest this money. There are a few points you need to consider first:

  1. Work out how much you need to live on each month comfortably. In other words, how much income do you need to generate from this investment?

  • Make sure that your income from this investment increases with inflation each year. Rather receive a lower income initially than discover that your income has halved in buying power within seven years.

  • Do you want to preserve the capital? Do you want to use the capital to boost your income or do you only want to live on the interest?

  • Do you have separate emergency funds? If not you would need to keep a portion of this lump sum in an easy to access, high interest bearing account.

  • Will you be retiring in 2013? Only convert the lump sum into an income once you need it. The longer it remains untouched the more it can grow and provide you with a higher income later.

    • Annuity
    If you want to use the capital to boost your income, you can buy an annuity that pays you a set income each month which increases with inflation. Currently a R1,5-million inflation-linked annuity for a 65 year-old would provide just over R8 000 a month.

    Considering that you will be 70 by the time you invest this money you will receive an even higher income as the rates are based on life expectancy.

    It will also depend on the interest rates at the time. It is likely that interest rates will be significantly higher in two year’s time which will count in your favour.

    If you go this route make sure you opt for an inflation-linked annuity so you can maintain your lifestyle and you will also need to decide if you want the annuity to continue to provide for your spouse if you pass away first.

    Shop around before buying the annuity because rates can differ significantly between insurers.

    Preserve with income
    If you want to preserve your capital, you can invest with a prudential unit trust fund that pays a high level of income whilst growing the capital.

    Marriot Prudential Income Fund for example is paying 4,9% and includes investments in equities and offshore. The aim of the fund is to continue to grow the capital in line with inflation so that your income increases each year. In your case this would provide you with an income of around R6 000 currently.

    Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.