A Fin24 reader in his late twenties, with R50 000 to invest, wants to know if the interest from the investment would be enough to live off in ten years' time.
I am 27 years old [and] I have R50 000. I would like to invest all this money [and] eventually live off the interest that it produces, beginning when I'm 37 (that is, ten years from this year). Is my goal reachable, and how could I invest this money to realise that goal?
Brett Mackay, Investment Consultant & Group RA Manager at 10X Investments, responds:We are unable to give a definitive answer without doing a full financial needs analysis. In particular, we would need to know how much interest income you need per month, after tax, to maintain your desired living standard. We also don't know what interest rates will be in ten years' time.
We can, however, say with 99.99% certainty that you won't realise your goals unless you strike an investment jackpot. If you had invested R50 000 in Bitcoin ten years ago, when the Bitcoin price was $1, that investment would now be worth more than half a billion rand. That's enough to retire on for most people.
However, if you plan to invest your money more conventionally, into a portfolio that is appropriate for your time horizon and that is adequately diversified across shares, bonds and cash, you should expect more moderate returns. Shares have historically delivered the highest returns (around 6% to 7% per annum after inflation), but with considerable short-term volatility. Bonds and cash provide lower returns (around 2% to 3% after inflation) but with much less volatility.
Given that you plan to live off the interest when you turn 37 (i.e. convert your portfolio to cash), you would need a portfolio strategy with high exposure to shares initially, that gradually decreases as you approach 37. Such a strategy might deliver, on average, a net real return (after inflation and after fees) of 4% over this period.
That means your R50 000 investment would be worth around R75 000 in ten years' time, in today's money terms. Assuming that interest rates are 5% in ten years' time, you would receive an annual income of R3 750, or around R312 per month. I suspect that wouldn't be enough. Also, that income is likely to fluctuate year to year, depending on prevailing interest rates. Further, the value of your capital (and hence your interest income) will lose purchasing power every year owing to inflation, so investing all your retirement savings into cash is generally not advised.
The bottom line is that you will have to save more, and for much longer, and invest your money more appropriately when you do retire, to secure your lifestyle in retirement. The general rule is that you need to save 15% of your income for around 40 years and invest this money in a well-diversified, high-equity, low-cost portfolio to have a chance of securing a comfortable retirement.
Compiled by Allison Jeftha.
- Questions may be edited for brevity and clarity.
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