First published in the Daily Maverick 168 weekly newspaper.

Answer: There are a number of options open to you. These options will depend on your circumstances.

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

Maximising income

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

A life annuity will pay you and your wife an income for the rest of your lives. This income can be a set amount or you can have it increase by an agreed percentage every year.

To give you a sense of how much you can get for your R3,000,000, look at the table below:

 A big portion of this payment is tax-free. In the case of the R26,843 annuity, you would only pay tax on R10,984. This really represents good value for money.

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

You also do not carry a longevity risk – you can live to the age of 105 and the pension will be paid to you every month.

You would be getting significantly more here than you would with a discretionary income fund. If you were to use the recommended 5% draw-down rate for your age, then the monthly pension would be R12,500.

Yet when you and your wife pass away, there would generally be no further payments made.

Income plus capital preservation

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

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

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

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

When you construct a portfolio, you need to look at the purpose and timeframe of the investment. Markets go up and down all the time, but over the long term they generally go up.

The levels of these ups and downs depend on how conservative or aggressive you are when it comes to investing.

If you are a conservative investor, you would typically invest in the bank, gaining interest, or a money market. Here the ups and downs would be low, and the returns would not be that great.

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

If you need money over the short term, you do not want to have it in the stock market, because the share prices may be low when you want to access your money. It is much better to have short-term money in the money market account.

The three-pot approach

I like to use the three-pot approach for my clients, based on their needs in terms of the timeframes they’re considering.  

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

Pot 2 contains the bulk of your investment. This would be invested in a balanced portfolio with a risk profile that you are comfortable with. It would typically be cautious or moderate.

Pot 3 contains the same amount as you would have invested in the money market portfolio. Here I would target investments with a longer timeframe and more aggressive investment risk profile.

Every year, we would have another look at the portfolios and rebalance them to ensure there is sufficient cash in Pot 1 to last you a year.

Remember that there are many factors that have an impact on your finances, so please consult a professional before making any decisions. DM168

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