A Fin24 reader, writing on behalf of her grandmother, wants to know what short-term investment vehicle would be best in yielding enough profit to live on, while preserving her capital investment. She writes:
My grandmother recently received a third of her retirement money as a lump-sum payment (roughly R200 000), and she wants advice on what to do next. She will be receiving the rest of her retirement as a monthly salary until she passes on. She wants to invest in an investment vehicle that will allow her to live off the profit, but still preserve the initial capital.
The time frame for the investment should be short term as she is only 65 years old. Any advice on what to invest in would be appreciated as she currently has the money sitting in a 32-day-notice bank account.
Hester van der Merwe, Wealth Manager for Ultima Financial Planner, and Financial Planner of the Year 2020 responds:
Thank you for your question. The final answer will depend on your grandmother’s personal circumstances. For instance, does she have an emergency fund, what is her health status and will her fixed pension escalate annually?
The answers to these questions will dictate whether she can afford to fix the capital for a period or if she needs to keep a portion in an account where she will have immediate access thereto. Your grandmother also needs to take into account that we currently find ourselves in a low interest rate cycle. This means that she may not earn as much in a bank account as she might have been expecting. However, some fixed deposits may offer a rate that will be acceptable to her. It is important to determine if a fixed deposit will pay interest on a monthly basis or only when it matures.
Confirm the monthly interest payment beforehand and do not invest with only an interest rate quoted, as her understanding of the interest calculation may differ from the actual interest offered by the bank.
Your grandmother can also consider investing the amount in an RSA Retail Bond. Investors in Fixed Rate Retail Savings Bonds who are 60 years or older can choose to receive the interest on a monthly basis.
She must make sure to select this option upfront, as it cannot be changed once the investment has been finalised. As with fixed deposits, the interest rate will depend on the selected term.
Since she is only 65 years old, she may need to depend on these funds for a number of years. Ideally, she would need some capital growth on the amount to ensure that inflation does not erode the buying power of her capital.
This will, however, involve a higher risk investment as the capital value can fluctuate over the short term and taking an income from the fund can cause a capital loss during such periods. It is strongly recommended that you seek the advice of a Certified Financial Planner® if you decide to go this route.
*Questions may be edited for brevity and clarity.
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