Question: I read with interest your recent article in DM168 regarding retirement options.

I retired three years ago and have the following retirement income sources:

I need about R20,000 a month to cover my costs and have noticed that the capital in my emergency fund is decreasing every month.

Does it make sense to convert the sum in the living annuity to the life annuity in an attempt to avoid or reduce drawing from the emergency fund, as it was not intended as income?

Your advice is much appreciated, as my financial adviser is very scarce these days.

Answer: You need about R4.8-million to get an income of R20,000 a month. Your current investments are worth R3.4-million, which is why you are starting to run into trouble.

The good news is that you spotted the problem early and we can still do something about it. You have two main options:

• Increase the drawdown of the living annuity; or
• Convert the living annuity into a guaranteed life annuity.

Increase the drawdown of the living annuity

A sustainable drawdown rate for a living annuity is 5% and you are only drawing down 2.5%, so there is scope to increase the drawdown rate.

If we do so, we will have the following:

You will still need to use R4,600 a month from your emergency fund to meet your needs of R20,000 a month. This equates to a drawdown of 9% a year, so you will deplete this fund.

Convert the living annuity to a life annuity

Life annuity rates are good at the moment and the R1.3-million will give you a life annuity of R10,300 a month, increasing by 5% a year, for the rest of your life. This looks like a good solution, as you will not be making any regular withdrawals from your emergency fund.

You must bear in mind that tax will have to be paid on these annuities. This will work out to about R1,400 a month.

I would recommend that you try to manage your budget to accommodate the tax rather than make regular withdrawals from the emergency fund.

It is important that you invest the funds in the emergency fund cleverly, as there will come a time when you will need to access some of these funds to live on. Pensioner inflation will be higher than your 5% annual annuity increase, and you will start to feel the pinch in years to come. 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.