First published in the Daily Maverick 168 weekly newspaper.
Answer: A discretionary investment plan can certainly solve a lot of your problems. I have used it to great effect for a number of my retired clients.
A discretionary investment plan is a lot like a living annuity without any of the living annuity restrictions. Because a living annuity is funded by the proceeds of a pension fund or retirement annuity (where you received tax benefits when you invested), you are not allowed to access the capital. You’re only allowed to draw down between 2.5% and 17.5%.
This is not the case with a discretionary income plan. These investments are typically funded from other savings or the sale of assets such as a property or a business.
With the income plan:
You can draw down on a monthly, quarterly or annual basis; and
You can change the income amount whenever you like; and the regular drawdown may not be more than 20% of the capital in a year. You may, however, draw out an ad hoc amount whenever you like.
How much should you draw each month?
This is a key decision. If the income you draw is too high, then you will start using up your capital and you stand a chance of running out of money.
We can use the Financial Sector Conduct Authority’s guidelines on living annuities to help us select the right rate for you. As a 75-year-old, you may draw down 5.5% of your investment. If you draw more than 8%, you will run into trouble. As he is 80, your husband may draw down between 6% and 9.5% (see Table 1).
How to improve your cashflow
Life annuity rates are really good at the moment. A life annuity is like a pension. You receive an amount each month, which increases each year. When you die, it stops or pays out a spouse’s pension.
I recommend to my retired clients that they take out a life annuity to cover their basic costs such as medical, rent and food.
I ran a quote for you where we use R1-million of your savings to buy a life annuity that will increase by 5% each year for the rest of your life (see tables 2 to 4).
As you can see, this will make a massive difference to your cashflow.
You must, however, bear in mind that with the second scenario, there will only be R700,000 instead of the R2.3-million for your heirs to inherit. But you will be trading this for a much higher level of financial security. Remember the life annuity will increase by 5% each year (see Table 5).
By shopping around, you may be able to improve your fixed deposit income.
The solution I gave above is based on a very limited knowledge of your financial situation.
The products I mentioned have a number of features that could be tweaked to provide you with a better solution to your specific needs. Your financial adviser should be able to help you achieve this. DM168
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