Get more bang for your buck from your retirement investments

Answer

You need about R4.8-million in order to get an income of R20,000 a month. Your current investments are worth R3.4-million, which is why you are starting to run into trouble. The good news is that you spotted the problem early and we can still do something about it. You have two main options: Increase the drawdown of the living annuity; or

Convert the living annuity into a guaranteed life annuity.

You must bear in mind that tax will have to be paid on these annuities. This will work out to about R1,400 a month

Increase the drawdown of the living annuity

A sustainable drawdown rate for a living annuity is 5% and you are only drawing down 2.5%, so there is scope to increase the drawdown rate.

If we do so, we will have the following:

You will still need to use R4,600 a month from your emergency fund to meet your needs of R20,000 a month. This equates to a drawdown of 9% a year, so you will deplete this fund.

Convert the living annuity to a life annuity

Life annuity rates are good at the moment and the R1.3-million will give you a life annuity of R10,300 a month, increasing by 5% a year, for the rest of your life. This looks like a good solution, as you will not be making any regular emergency fund.

You must bear in mind that tax will have to be paid on these annuities. This will work out to about R1,400 a month.

I would recommend that you try to manage your budget to accommodate the tax rather than make regular withdrawals from the emergency fund.

It is important that you invest the funds in the emergency fund cleverly, as there will come a time when you will need to access some of these funds to live on. Pensioner inflation will be higher than your 5% annual annuity increase, and you will start to feel the pinch in years to come.