The financial wellness coach: what is the best option …

Question: I have R3-million in a money market account. The returns have not been that 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 the Daily Maverick 168 weekly newspaper.

Reply: There are a number of options available to you. These options will depend on your situation.

  • Do you want to maximize your income?
  • Do you want to leave most of the capital to your children?
  • Do you want something in between?

Maximize income

If your children are financially independent and you want to get the best possible income, you will be hard pressed to do better than purchasing a life annuity.

A life annuity will provide you and your spouse with income for the rest of your life. This income can be a fixed amount or you can have it increased by an agreed percentage each year.

To give you an idea of ​​how much you can get for your R3,000,000, see the table below:

Much of this payment is tax free. In the case of the R26,843 annuity, you would only pay tax on R10,984. It really represents good value for money.

An advantage of this investment is that you do not run any investment risk. The stock market could collapse and your income would continue at the agreed amount each month for the rest of your life.

You also don’t run a longevity risk – you can live up to 105 years and the pension will be paid to you every month.

You will get a lot more here than with a discretionary income fund. If you were to use the recommended 5% withdrawal rate for your age, the monthly pension would be 12,500 Rand.

Yet when you and your wife pass away, no further payment is usually made.

Income plus capital preservation

You can use some of this money to buy yourself a life annuity.

I often recommend that my clients use a life annuity to cover their fixed costs such as medical help and basic living. expenses.

They then invest the balance in a discretionary investment plan, from which they take income.

These discretionary investment plans, if well constructed, can provide you with a sustainable income while leaving capital for emergencies or as an inheritance for your children.

When building a portfolio, you need to consider the purpose and timing of the investment. Markets go up and down all the time, but over the long term, they usually go up.

The levels of these highs and lows depend on how cautious or aggressive you are in investing.

If you are a prudent investor, you will generally invest in the bank, earning interest, or in a money market. Here the ups and downs would be small and the returns would not be that great.

If you put all the money on the stock market, the ups and downs would be much more turbulent, but the returns would be better over the longer term.

If you need money in the short term, you don’t want to have it on the stock market because stock prices can be low when you want to access your money. It is better to have short term money in the money market account.

The three-pot approach

I like to use the three-pronged approach for my clients, based on their needs in terms of the timelines they envision.

Pot 1 contains enough money to last you 18 months. This would be invested in the money market fund. The returns won’t be that great, but the money will be there when you need it.

Pot 2 contains most of your investment. It would be invested in a balanced portfolio with a risk profile that you are comfortable with. It would generally 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 period and a more aggressive investment risk profile.

Each year we would review the portfolios again and rebalance them to make sure there is enough liquidity in pot 1 to last you a year.

Keep in mind that there are many factors that impact your finances, so please consult a professional before making a decision. DM168

This story first appeared in our Daily Maverick 168 weekly newspaper which is available for free to Smart Pick n Pay shoppers at these Pick n Pay stores.

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