How to invest for income

I’m semi-retired and earn a R35 000 income through properties. Where do I invest R700 000 I have in unit trusts to draw additional income?

Brenthurst Wealth Management financial planner Sonia du Plessis answers:

You don’t have to necessarily move the R700 000 to another investment product – you can schedule the additional income you want to draw directly from the unit trust account.

You might just trigger costs by putting the funds in a new product or capital gains tax if you sell out of the current funds. A discretionary investment unit trust account caters for regular monthly withdrawals.

Decide what’s a safe amount to withdraw, especially if you don’t want to tap into your capital. I’d suggest taking a regular withdrawal of 4%-5% of the capital amount. Four percent would give you a R2 333 monthly income.

Also, determine if the underlying unit trust funds you currently hold are a suitable investment to draw income from.

You don’t necessarily want to withdraw regularly from an equity-only unit trust fund. When markets go down and you take income from a high-risk instrument, it’s like a double-edged sword. Your money will have to grow so much more to make up for the negative growth and the income withdrawn.

In the current challenging economy, take the regular withdrawal from a stable asset class. A good guideline is to put 2-3 years’ income in a money market unit trust or low-risk income unit trust. You then schedule the income from the low-risk fund. After the three-year period, the money is depleted and you top it up with your remaining funds.

This is called the “bucket approach”: the income portion will be in a low-risk bucket, a portion of the funds in a medium-risk bucket and the remaining funds in a long-term bucket.

Also, evaluate which unit trusts to use in your medium- and long-term bucket. Being semi-retired puts you in a lower-risk category. With the funds in your medium- and long-term bucket, you’ll have to bring in some growth assets. In uncertain times it’s good to have some offshore market exposure.

When markets go down and you take income from a high-risk instrument, it’s like a double-edged sword.