The Financial Wellness Coach: What’s the best option…
Question: I have R3 million in a money market account. The returns weren’t great. I’m 75 and my wife 70, and we use this money to supplement our pensions. Can you suggest an alternative investment?
First published in Daily Maverick 168 weekly newspaper.
Reply: You have several options. These options depend on your circumstances.
- Do you want to maximize your income?
- Would you like to leave most of the capital to your children?
- Do you want something in between?
If your children are financially independent and you want the best income possible, you will find it difficult to do better than buying an annuity.
An annuity pays you and your wife an income for life. This income can be a fixed amount or you can increase it by an agreed percentage each year.
To give you an idea of how much you can get for your R3,000,000, take a look at the table below:
Much of this payment is tax-free. In the case of the R26,843 pension, you would only pay tax on R10,984. This is really good value for money.
One advantage of this investment is that you do not bear any investment risk. The stock market could collapse and your income would continue to grow at the agreed levels each month for the rest of your life.
You are also not at risk of longevity – you can reach the age of 105 and the pension will be paid to you monthly.
You would earn significantly more here than with a discretionary income fund. If you use the 5% occupancy rate recommended for your age, the monthly pension will be R 12,500.
However, if you and your wife die, no further payments are usually made.
Income plus capital preservation
You can use part of this money to buy an annuity.
I often recommend my clients to use an annuity to cover their fixed costs like medical care and living expenses Costs.
They then invest the credit in a discretionary investment plan, from which they draw an income.
These discretionary investment plans, if well constructed, can provide you with a sustainable income while leaving some capital for emergencies or as inheritance for your children.
When building a portfolio, you need to consider the purpose and time frame of the investment. The markets go up and down all the time, but in the long run they generally go up.
The size of these ups and downs depends on how conservative or aggressive you are in investing.
If you are a conservative investor, you usually invest in the bank for interest or a money market. Here the ups and downs would be small and the returns not so great.
If you put all of your money into the stock market, the ups and downs would be a lot more turbulent, but the returns would be better in the longer term.
If you need money in the short term, you don’t want to have it on the stock market as stock prices can be low when you want to access your money. It is much better to have short-term money in the money market account.
The three-pot approach
I like to use the three-pot approach for my clients based on their needs for the time frame they are considering.
Pot 1 contains enough money for 18 months. This would be invested in the money market fund. The return won’t be that big, but the money is there when you need it.
Pot 2 holds the bulk of your investment. This would be invested in a balanced portfolio with a risk profile that you are comfortable with. It would usually be cautious or moderate.
Pot 3 contains the same amount that you would have invested in the money market portfolio. Here I would target investments with a longer time frame and a more aggressive investment risk profile.
Every year we would look back at the portfolios and rebalance them to make sure that there was enough cash in Pot 1 for you for a year.
Remember that there are many factors that can affect your finances. Therefore, please consult a professional before making a decision. DM168
This story first appeared in our daily newspaper, Daily Maverick 168, which is available free of charge to Pick n Pay smart shoppers at these Pick n Pay Shops.
Kenny Meiring MBA CFP is an independent financial advisor. You can contact him at Financialwellnesscoach.co.za. Please send your questions to [email protected]