170 - Options for generating income for a lump sum

Question We recently sold a flat which we used as an investment property as we found the hassle of maintenance and dealing with tenants was becoming a bit much (I am 70 and my husband is 75).  We have R2.4m to invest.  What would you recommend that we do in order to supplement our income?

Answer I do not have enough information on your full financial situation in order to make a recommendation.  I would, for example, need to know what other assets you have, what other income streams you receive and whether there are any dependants that may need to inherit from you.

There are a couple of options for you to consider. 

Life annuity

You could get a life annuity that would pay you a monthly amount of R25 000 a month till both you and your husband pass away. Alternatively, you could get an annuity that increases by 5% a year that would be payable for the rest of yours and your husband’s lives. This would start at R18 250.

As this investment will be made with after tax money, a significant percentage of the income will be classed as a capital drawdown and not attract income tax.

The advantage of a life annuity is that the income is guaranteed for the rest of your lives no matter what happens in the stock market. However, when both of you pass away, there would be nothing for your heirs to inherit.

Retail bonds

Another option to consider is going the retail bond route.  Here you can lock in a return of 10.5% for 5 years.  This would give you a level monthly income of R21 000 for the next 5 years, after which you would have your capital returned to you.  You could then reinvest it in bonds, if the rates are good, a life annuity or a discretionary investment.

Something you would need to be aware of is that your capital will be worth less than it is now as inflation will have taken its toll.

It may be an idea to look at splitting the investment in two with half being invested in your name and the other half in that of your husband.  This could result in some tax savings.

Discretionary investment

With a discretionary investment, you would invest the funds into a portfolio of unit trusts and do monthly drawdowns from it.  As long as your drawdowns are less than the growth of the investment less its running costs, then you should be in a situation where your income will continue for the rest of your lives.

The recommended drawdown for this type of investment is 5%.  You could therefore make monthly withdrawals of R10 000 from this investment without endangering the capital. The advantage of this approach is that if the investments do well, the capital will grow over time and your income will increase.

You will also have access to the capital should you have an urgent need for capital.

To summarise you have the following options to consider:

Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives.  You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za