How do I invest for a R 20 000 monthly income?
This is a very general question that I will make a couple of assumptions on:
I’m going to assume the reader will need: R20 000 per month (pm) after tax. I will therefore work on gross figure of R25 000 per month income required, in other words R300 000 per annum. After deducting income tax, it will give the reader R20 977 per month after tax, therefore slightly more than the desired income amount. I’ve only taken the primary income tax rebate into account. If the person is older than 65, he/she will receive a bigger annual income tax rebate.
Whether the capital should be depleted or untouched after a 20-year period is important. I will answer both scenarios.
To receive an after-tax income of R20 000 pm, the starting capital you would need in today’s terms would be R8.5 million. I’ve made the following assumptions: capital will grow at 6% pa after retirement. The R25 000pm, gross income, will cater for a 6% inflation increase every year. We are currently in difficult market conditions, but given long-term growth trends for equities, we should get 7% to 8% from investments with a reasonable amount of equity exposure.
If we get better growth – for example 10%, the picture would be a lot different. At the end of the term, ie 20 years – assuming 6% growth, a 6% withdrawal increase every year and a R25 000 income – the capital will be roughly R8.6 million. I can say with reasonable certainty that we will get better than 6% growth and therefore better results at the end.
I’m assuming the reader doesn’t need the capital to be intact after 20 years. To receive an after-tax income of R20 000 pm, the starting capital you would need in today’s terms would be R5.7 million. After 20 years, capital will be depleted. I’ve made the following assumptions: capital will grow at 6% pa after retirement. The R25 000 pm, gross income, will have a 6% inflation increase every year, assuming again a very low growth scenario.
At a recent presentation by Allan Gray, it identified the following as three of the biggest risks someone close to, or at retirement is currently facing:
- inflation, and
- the underlying investment assets.
I fully agree with this statement from Allan Gray.
If I unpack this: 1) Longevity is a big threat to capital. Retirees have to make an assumption that they will live 30 years after retirement. 2) Inflation: South Africa has a high inflation rate – the long-term average is at least 6%. 3) Underlying investments – one of the biggest risks retirees are facing is placing their investments in much-too-conservative assets. It’s very important to give the capital exposure to growth assets – the recommendation is to have at least a 50% equity exposure. It is a big risk to have all your retirement funds in money market funds – the growth will not keep up with inflation.
According to Allan Gray, the average retired individual on Allan Gray’s books is taking a 7% per annum income. New statistics are showing that retirees should aim to take an income of 4% of capital in the starting years.
If I go back to the readers question, if he/she takes a R300 000 pa income (gross) from R8.5 million it works out as 3.50% as percentage of capital, which is a safe withdrawal rate.