While it seems like a simple question there are many considerations that need to be accounted for when asking: Can I retire on R2 million?
It is important for a financial advisor to provide a client with guidance regarding questions that have been asked, but also to provide answers to questions that the client hasn’t thought to ask yet.
The question was posed from a 48 year-old requiring at least R30 000 a month to survive current debts, they were considering resigning due to pressures affecting health.
Normally, you can retire from a pension fund from the age of 55. The law does however allow for you to retire at any age provided that the retirement is due to ill health. The rules of the pension scheme should also be reviewed to see what is allowed in your specific case. You can only retire from a pension fund based on the rules of the fund as set out by the employer and this is generally between 60 – 65 years of age. However, you can retire from a retirement annuity from age 55.
First, one needs to look at whether an income of R30 000 per month or R360 000 per annum is sustainable from capital of R2 million. This level of income would mean that you need to have interest and/or growth on your money of 18% per annum if you want to preserve the capital. In current market conditions, this is unlikely.
Furthermore, from the following year, you will have to increase your withdrawal rate due to inflation. Debt repayments can also become more expensive if interest rates rise. An investment amount of R2 million with a drawdown of 18% per annum is not likely to be sustainable over your lifetime as it will only take about six years before your capital is depleted.
A sustainable withdrawal rate for your capital investment would be between 1.4% and 3.5% per annum, given that you are currently 48 years old. This will provide you with an income of R70 000 a year or R5 833 a month.
Should you be able to retire from your pension scheme, you will be able to take up to one third of your capital in cash from your benefit in the fund. Be aware that this cash lump sum will be taxed accordingly.
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 fixed sum every month. The amount will depend on your age, current interest rates and the annual increase you want to receive amongst other things.
Your other option is to 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 also taxable.
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 become 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 accordingly. You could end up paying an exorbitant amount in tax, negatively impacting on the sustainability of your income. With some more in-depth financial advice you may be able to reduce your monthly expenses by making simple lifestyle choices that allow you to easily pay off some of your debts.
A comprehensive answer to the opening question requires you to take into consideration numerous possibilities, such as:
- The income earning potential of your assets.
- Whether or not there any other income earners, such as a spouse, you can rely on.
- The nature and end term of your debt and your monthly expenses.
- Your current health situation and how this may impact upon your life expectancy.
- Whether or not you have dread disease and or disability cover.
It is never too early to start planning for your financial goals and having realistic expectations, helping you to avoid making costly financial mistakes.
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