HAVE I ENOUGH ON WHICH TO RETIRE?

I am 57 and would like to retire at 60 after 40 years’ service with the same company. If my retirement fund value is R3.7 million and I don’t owe anything on a mortgage bond or car, would I be okay if I retired at 60? My take-home pay is between R40 000 and R45 000 a month.

Name withheld

Pierre de Bruyn, a financial adviser at PSG Wealth in Northcliff, Johannesburg, responds: Anyone who belongs to a retirement fund can retire and start drawing an income once they reach the retirement age of that fund. However, the important issue is the sustainability of the income stream in retirement. There are many variables that go into putting together a comprehensive retirement plan, and few people can maintain the same level of income after retirement. 

To keep things simple, I will attempt to provide you with an answer as if you were retiring today. You say that your retirement fund value is R3.7m. If we assume that you will take at least the first R500 000 tax-free, you will be able to buy an equity-linked life annuity (Ella) for R3.2m and invest the R500 000 in a voluntary investment plan, or something similar. 

On the Ella balance, you will be able to make withdrawals at a rate of between 2.5% and 17.5% a year. There are no limits on voluntary investments. However, the recommended withdrawal rate is a maximum of 4.5% a year if you want your income to keep up with inflation. If we apply this to the R3.2m, it amounts to R12 000 a month, or R144 000 a year. This still needs to be adjusted for tax. If you withdraw a similar amount from the R500 000 at 4.5% a year, this amounts to R1 875 a month, or R22 500 a year. You can see that these numbers fall far short of your current income. 

The choices are to reduce your expenses or defer your retirement. Doing both will have a positive effect on your situation over time.

I suggest that you find a qualified financial planner to assist you with this process and deal precisely with your situation so that you do not have any nasty surprises later in retirement when you have no time left to make adjustments to your long-term plans. 


INVESTING FOR A CHILD

My nephew is turning one soon. For his birthday, I would like to invest R5 000, for him to access on his 21st birthday. What are the best options for this kind of investment?

Name withheld

Magdeleen Cornelissen, a financial adviser at PSG Wealth in Menlyn, Pretoria, responds: Creating an investment portfolio for a child is one of the loveliest gifts you can bestow. If set up correctly, such an investment can be a much-needed enhancement to his investment portfolio when he turns 21.

There are many routes to follow, but not all roads lead to Rome, and you have to be aware of various aspects related to such a portfolio. 

In making your decision, you need to look at the investment vehicle, as well as the portfolio construction. You should also compare the fee structures of the products you’re considering, because some of the products that were often used in the past had a high expense ratio.

When setting up this investment, I advise you to remember that this is a long-term investment, and the assets included in the portfolio must be suitable to reach the goal of long-term wealth creation. 

Over the years, we have learnt that equities tend to provide the best alpha-generating returns, when measured over the long term. Given the amount that you want to invest, an effective way to access equities is via a unit trust fund or an index-tracker fund. Please discuss the details of such a fund with your accredited financial adviser, because there are many options from which to choose.

In the past, it is likely that the most popular option would have been a study policy, but, as already mentioned, some of these products were expensive. Today, a popular option would be a tax-free investment plan, which could house the investment portfolio for your nephew and would mean that all the returns received are tax-free. Taking into account that the term of the investment is 20 years, the outperformance created by the tax-free environment should play an integral part in your decision-making process. 

However, you need to take into account that the tax-free investment is a liquid portfolio, and you will most likely not be able to guarantee that your nephew will access the funds only once he turns 21. On the plus side, this creates an ideal starting point for your nephew to build a relationship with a financial adviser from an early age. This person will be able to guide him in his investment journey and help him to understand the benefits of your long-term investment vision.


HOW TO INVEST R100 000?

I have R100 000, which I received after selling my house. I need to invest it for five years. Where can I invest this money for the best interest rates? 

Name withheld

Jac de Wet, the head of national sales at PSG Wealth, responds: If it is simply a matter of earning a high interest rate, you may find that a fixed-interest investment looks appealing – on paper at least. 

However, you need to be careful and check how the return is calculated, and when and how interest is paid, because these comparisons are not always straightforward. You may find that, if you have used your interest rate tax exemptions, your after-tax returns could be disappointing. 

Furthermore, you have to bear in mind that this kind of investment does not offer unrestricted access to your investment – you may be penalised for making an early withdrawal, or be restricted from doing so altogether. Therefore, you need to weigh up how long you are likely to leave your investment untouched against your need to access the investment. 

When it comes to liquidity, money market funds may seem appealing. 

However, the discussion thus far has covered only interest rates and – I deduce – your need for certainty. The reality is that “certainty” in investment terms is not as straightforward as it might seem. Your investment objective (best rate of interest/certainty) and investment term (five years) do not entirely match. Five years is a fairly long investment term, and it is therefore important to bear in mind the erosive effect of inflation. Even a “good” interest rate is unlikely to deliver inflation-beating returns in the long run.

Growth assets, such as equities and listed property, are the only asset classes that have proved to outperform inflation over time. Unfortunately, these assets can be volatile in the short term, which often puts off investors. In the long term, however, your likelihood of achieving a negative return diminishes significantly. 

However, investing is not an all-or-nothing game, and you can choose a multi-asset portfolio that combines growth assets (equities) with more stable money market and cash-type assets to deliver a smoother overall investment ride that still outperforms inflation at a higher margin. There are a number of unit trust funds and funds of funds that can do this. 

However, this is where the plot thickens. You also need to consider the tax implications. If you are on a high marginal tax rate, you could, for example, benefit from accessing a multi-asset fund via an endowment policy, limiting the tax impact on your portfolio when you eventually sell it. 

The appropriate answer depends on a number of considerations and your unique circumstances. Therefore, when answering even a simple question such as “where do I earn the best interest rate”, you could benefit from talking to a qualified financial adviser, to ensure that you consider the bigger picture when making a decision. 


INVESTING: WHERE DO I BEGIN?

I’m finally in a position where I can start investing for my future, but I know of many people who’ve made mistakes along the way. Do you have any tips that will help me to get started on the right foot? 

Name withheld

Marilize Lansdell, the chief executive of PSG Wealth, responds: Congratulations on deciding to start investing; it will go a long way to securing your future financial well-being. If I had to offer just three tips to get you started, these would be: 

• Partner with trusted providers. Make sure the people to whom you entrust your money will exercise the highest level of care. Trusted providers have long-term track records, offer clients value for money and deliver on their promises. 

• Consider your investment choices carefully. You need to have a sound investment strategy, and your underlying investments must equip you to reach your goals. Many investors with long-term goals end up in short-term money market investments that are ill-equipped to deliver inflation-beating growth. 

• Keep a professional mindset. Behavioural biases are the biggest downfall for novice investors, who tend to be reactive in response to market uncertainty. Partnering with a qualified financial adviser is one of the best ways to overcome built-in biases and to make better, less emotional decisions. 


Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.