164 How to balance different needs when setting up a retirement income

Question 

I have R3 million in retirement savings and am looking for an income of R25 000 a month.  

Should I pass away, I would like my wife to receive the same pension that I received.  

I would also like my children to receive an inheritance from the retirement savings.  

What would be the best option to receive this. 

Answer 

I am not sure if the monthly amount that you receive is before or after tax.  This does make a difference to the capital you need and the solution we use. 

If you want to receive R25 000 a month after tax, you would need to receive a pension of about R30 000 a month.  This means that you would need to have retirement savings of around R7.2m if you want to fund it via a living annuity. 

If the R25 000 a month is before tax, the after-tax amount will be R21 500.  This means that you would need to have retirement savings of around R5m if you want to fund it via a living annuity. 

You have savings of R3m so we will have to think outside the box if we want to get close to the income that you need.

 Living annuity 

If you use a living annuity and drew down 5% a year, you will receive R15 000 a month which works out to R11 700 after tax. The advantage here is that the annuity would continue for your wife and daughter’s lives if the funds are correctly invested.  The income, however, is a lot lower than what you need. 

Joint Life Annuity 

The best income that we can get you is from a joint life annuity.  This will be paid until both you and your wife pass away.  The income will increase by 5% a year for the rest of your lives.  This pension will start at R19 400 which will give you R17 400 after tax.  

The downside here is that if you and your wife pass away, nothing will go to your children.  We can put in a guarantee that says the income will be paid for a minimum of 5, 10, 15 or 20 years but this will reduce the monthly income. 

Capital Preservation annuity 

A third solution is a capital preservation annuity.  Here you will receive a monthly amount of R15 200 after tax and fees.  This amount will increase by 5% a year for the rest of your life. When you pass away, the capital value of R3m would be inherited by your wife who would use these funds to get a pension for herself.  If she chose a capital preservation annuity for herself, the R3m would be available to your children when she passes away. 

To summarise, we have 

In addition to these, you can also consider a hybrid solutions where some of the income comes from a life annuity and the balance from a living annuity.  You can also have a capital preservation annuity that covers only part of the initial investment.  

As all of these will fall short of what you need, I would recommend that you consider delaying retirement or reducing your post-retirement budget.

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