MONEY CLINIC | My wife and I are in financial distress. How should we invest our R1.5m?

Couple going over their finances together at home
Couple going over their finances together at home
katleho Seisa/Getty

A Fin24 reader and his wife, facing unemployment, are looking to invest in a five-year deposit investment in the hopes of living off the interest accumulated. 

He writes:

My wife and I would be extremely thankful for your advice.

I am 54 and my wife is a year younger. The children are out of the house and supporting themselves. I was retrenched a month before lockdown and my wife will possibly sit without employment once lockdown is lifted as the small business that employed her is in financial distress.

She was only earning a small salary of +/- R6 000pm.

In total we have R1 575 000 to invest to provide monthly interest. There are no other income streams or retirement annuities etc. On the plus side we have absolutely no debt whatsoever. Our townhouse, vehicles etc are paid for. Our monthly expenses only amount to +/- R8 000pm.

Considering we are still relatively young we should probably invest in a franchise business. However, considering the current economic climate, which is further impacted by the uncertainty of the Covid-19 pandemic, we thought it prudent to invest in, say, a five-year fixed deposit investment, living off the interest, and ride out the storm.

Finbond Mutual Bank has offered us 11% on a five-year fixed deposit. Our questions are (1) would our money be safe at this institution and (2) is there another option you could advise us about?

Your views and advice would be greatly appreciated.

Hardi Swarts, director of Autus Private Clients, and Financial Planner of the Year, 2019 responds: 

I am sorry to hear about your circumstances. Unfortunately, we are going through unprecedented times, and many South-Africans and others around the world find themselves in similar situations.  

The good thing is that these days people in their 50s are considered young, and you have many working years ahead of you in which to earn.   

It’s an excellent thing that you have no debt. Well done! A withdrawal of R8 000 per month equates to an approximately 6% drawdown rate, so you would need to earn more than 6% plus inflation to preserve the value of your capital.

Considering we are still relatively young, we should probably invest in a franchise business. However, considering the current economic climate which is further impacted by the uncertainty of the Covid-19 pandemic, we thought it prudent to invest in say a five-year fixed deposit investment, living off the interest and ride out the storm.

I agree! There is much uncertainty regarding the long term economic impact of the Covid-19 pandemic. Many franchise businesses have directly been impacted by the pandemic and the lockdown regulations, especially the restaurant and take-away franchises. Taking this into consideration, I agree it might be prudent to wait until the storm has cleared. 

I recommend that you consider the following factors in your decision to invest in a fixed deposit: 

• The disadvantage is that you lose the flexibility to access your funds for the five-year period. You may have to pay early withdrawal fees if you need the funds for a business or for some kind of emergency. 

 The advantage is that it will provide you with a higher return than an average savings or money market account, and you are assured of that return for the term of the investment. 

• If you do decide to invest in a fixed deposit, you may want to consider only investing a portion of your capital. Thus, having the rest of your money immediately available should you need it.

Finbond Mutual Bank has offered us 11% on a five-year fixed deposit. Our questions are (1) would our money be safe at this institution and (2) is there another option you could advise us about.

I have limited knowledge about the bank and their offering, and therefore cannot comment. In general, I recommend considering highly reputable banks and financial institutions. 

Compiled by Allison Jeftha. 

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