A Fin24 reader who retired seven years ago and has been living off other investments will soon gain access to a R2 million fixed deposit. He seeks the advice of an expert on how to go about cutting back on his monthly expenses.
I have R2 million coming out of fixed deposit soon and need to then reinvest it in something like a Living Annuity.
I am 70 and retired seven years ago and been living off my other investments...but the capital amount is shrinking and this investment will reach zero in a year or so.
We live well and have no debt except the monthly expenses which amount to about to about R15 000. This includes medical aid, insurance, townhouse levy, rates, Telkom and MultiChoice.
I would like to reduce these expenses by getting rid of the medical aid and insurance, which comes to R4 500 pm. The medical aid is only a hospital plan, which was last used six years ago, and the insurance covers our two cars. We stay in Margate so crime is low and I am willing to take the risk and cancel these contracts and invest the money every month into a separate account and see what happens. We are not sickly BUT I am nervous to do this only because my wife will freak if I cancel them.
Murphy's Law is that if I cancel then something will happen.
Any advice? Thanks for addressing this issue for me.
Hardi Swarts, director of Autus Private Clients responds:
You can only purchase a Living Annuity with retirement funds such as retirement annuities, pension and provident funds. This limitation exists as Living Annuities offer tax benefits in that there’s no tax on the growth of the capital within the fund. Living Annuities also don’t form part of your estate and attract estate duty.
The choice of investment depends on the purpose of the capital. If you’d like to use the funds to generate an income, you could consider the purchase of a voluntary Life Annuity, which will provide you with a monthly income. You could also purchase unit trusts and draw down a certain amount from the investment every month.
If the source of funds is from retirement savings, a Living Annuity is not a bad option. There are, however, certain restrictions that you need to consider, including:
- The loss of access to your capital
- The loss of control of your drawdown rate. (You can only change it once a year on the anniversary date of the policy. Thus, you are locked into a fixed amount for the whole year, even though your circumstances may change. And you can only draw down between 2.5% and 17.5% of the fund.)
A R15 000 withdrawal from a R2 million investment represents a 9% withdrawal rate, which is very high. Ideally, your drawdown rate shouldn’t be higher than 4.5%.
Regarding your expenses, I highly recommend that you don’t cancel your medical aid and insurance.
These expenses assist in mitigating financial risk, which is essential in financial planning. There are a couple of other options you may want to consider, including:
- Selling one of your cars and investing the money.
- Sourcing additional insurance quotes to lower your monthly premium
- Replacing your DSTV subscription with Showmax or Netflix. (R1 000 compared with R150. You do, however, need a fairly fast internet line.)
Questions may be edited for brevity and clarity.
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