Daily Maverick
Dailymaverick logo

Business Maverick

Business Maverick, South Africa, DM168

There are retirement options if you haven’t saved enough

There are retirement options if you haven’t saved enough
Kenny Meiring
By Kenny Meiring
2 Jun 2024
Facebook
2
A living annuity, a joint life annuity or a capital preservation annuity or a hybrid solution are among the options, but there are pros and cons to all of them

Question: I have R3-million in retirement savings and am looking for an income of R25,000 a month. Should I die first, I would like my wife to receive the same pension that I received.

I would also like my children to receive an inheritance from the retirement savings. What would be the best option to achieve this?

Answer: I am not sure if the monthly amount that you want to receive is before or after tax. This does make a difference to the capital you need and the solution we use.

If you want to receive R25,000 a month after tax, you would need to receive a pension of about R30,000 a month. This means you would need to have retirement savings of about R7.2-million if you want to fund it with a living annuity.

If the R25,000 a month is before tax, the after-tax amount will be R21,500, so you would need to have savings of about R5-million if you want to fund it in the same way.

You have savings of R3-million, so we will have to think outside the box if we want to get close to the income you need.

Living annuity


If you use a living annuity and draw down 5% a year, you will receive R15,000 a month, which works out to R11,700 after tax. 

The advantage here is that the annuity would continue for your wife and children’s lives if the funds are correctly invested. The income, however, is a lot lower than what you need.

Joint life annuity


The best income we can get you is from a joint life annuity. This will be paid until both you and your wife have died. 

The income will increase by 5% a year for the rest of your lives. This pension will start at R19,400, which will give you R17,400 after tax.

The downside here is that if you and your wife die, nothing will go to your children. 

We can put in a guarantee that says the income will be paid for a minimum of five, 10, 15 or 20 years, but this will reduce the monthly amount.


Capital preservation annuity


A third solution is a capital preservation annuity. Here you will receive a monthly amount of R15,200 after tax and fees. This amount will increase by 5% a year for the rest of your life. 

When you die, the capital value of R3-million would be inherited by your wife, who would use the funds to get a pension for herself. If she chose a capital preservation annuity for herself, the R3-million would be available to your children when she dies.

In addition to the options I have outlined here, you can also consider a hybrid solution by which some of the income comes from a life annuity and the balance from a living annuity. You can also have a capital preservation annuity that covers only part of the initial investment. 

As all these options will fall short of what you need, I would recommend that you consider delaying retirement or reducing your post-retirement budget. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected]

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

Categories:

Tags: