When R7 million is not enough
CURB YOUR ENTHUSIASM: DON’T CASH IN IN A PANIC
Jamey Lipschitz, a portfolio manager from Sanlam Private Wealth, advises a reader who wants to know what to do with his share portfolio when he retires.
Q: I have a portfolio of blue-chip shares worth around R7 million. I am 63 years old and retiring in three years’ time. Should I stay in shares or invest in something else? I will need around R700 000 a year, and I have some annuities as backup.
Answer: First, most of the world is in a low-yield environment. Some countries are providing a negative yield on cash investments for the first time in history.
This has forced investors into higher risk asset classes like equities and property. But this has pushed up the valuations of these asset classes and many are now considered expensive. In turn, the relative yield has come under pressure as the prices increased.
Second, equities are considered high risk compared to other asset classes. It is therefore important to establish what percentage exposure to equities is appropriate based on an investor’s risk profile and income requirements.
There are periods when equities do not perform and one must be able to stay invested for the long term and not be a forced seller for income purposes. This will ensure that one derives the full upside and value.
Third, the dividend yield on South African equities is about 3%. That means that a R7 million equity portfolio would yield around R210 000 a year. That is a shortfall of R490 000 every year on the R700 000 income required.
There are certain equities that provide a higher yield, but making changes will potentially incur capital gains tax and brokerage charges. One must also consider the 15% tax on dividends.
Fourth, other asset classes like preference shares and bonds provide a higher income yield, however, their potential for capital growth is generally more limited than equities over longer periods. Bonds (fixed income) are also taxed at the investors’ marginal rate (potentially 41%) as opposed to the 15% tax on dividends for preference shares and equities.
Lastly, R7 million might sound like a lot but it is not enough to provide a sustainable income of R700 000 a year. To do that comfortably, one would need almost twice as much.
Investors in this or similar positions should therefore consider whether they might need to extend their working lives or lower their retirement expenditure.
It is also important that clients who are approaching retirement do not sell down all their equities, which provide long-term, inflation-beating returns.
Professional investment advice is a sound start.
There are certain equities that provide a higher yield, but making changes will potentially incur capital gains tax and brokerage charges. One must also consider the 15% tax on dividends.