Is R2 million enough for retirement?

18% RETURN: REQUIRED TO GENERATE R30 000 A MONTH

Amanda Scholtz, an advisory partner at The Wealth Corporation in Tygervalley, Cape Town, advises a reader on stretching R2 million in retirement.

Q: I am considering resigning from work after nearly 30 years. I am 48 and expect about R2 million from my pension fund. Is it possible to get an investment that can give at least R30 000 a month?

Answer: Firstly, one needs to ask if R30 000 a month is sustainable from R2 million. You’ll need interest and/or growth of 18% a year if you want to preserve the capital.

In current market conditions, this is unlikely. Next year, you will have to increase your withdrawal rate due to inflation.

Debt repayments can also become more expensive if interest rates rise.

At The Wealth Corporation, we currently provide for an annual inflationary adjustment of 6%. On R2 million, with a drawdown of 18% a year, it will take about six years before your capital is depleted.

As you are 48, a sustainable withdrawal rate for your capital investment would be between 1.4% and 3.5% per annum, giving you R70 000 a year or R5 833 a month.

Traditionally, you can retire from a pension fund at 55. You can retire at any age due to ill health.

Should you be able to retire from the pension scheme, you can take up to one third of your capital in cash with the first R500 000 tax-free.

Anything above that is subject to a sliding scale of taxes, increasing with the amount.

You are required to invest the remaining capital in an annuity. You can purchase a compulsory or guaranteed annuity from an insurer that will pay you a fi xed sum every month. Or you can invest the remaining two-thirds in an investment-linked living annuity. In this instance, you will be able to nominate your income each year between the withdrawal limits of 2.5% and 17.5% per annum. This income is taxable.

Please bear in mind that if you choose to withdraw your income at the maximum of 17.5% and your investment doesn’t generate growth of the same or more, your capital will be depleted and your returns will be lower.

These options are only available to you if you are able to retire from the fund. Should you not be able to do so, any lump sum that is withdrawn will be taxed up to 36%, depending on the amount.

From the above, you can calculate that you could end up paying nearly R600 000 in tax on R2 million. This will further impact negatively on the sustainability of your income. While the 18% per annum you require to meet your income needs at present may seem high, your situation could be better than you think once a financial services professional has advised you in greater detail.

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