A retirement strategy for my parents

A Fin24 reader writes:

I am currently a student in an investments direction, and writing on my parents' behalf.  I invest in unit trusts for myself, so I said I will help them with the decision-making.

They are currently already living debt free, and are 15-20 years from retirement.

They received an inheritance of about R1.5m. Now the question is what to do with this to try and secure a better retirement. Currently they have a house worth about R1.5m to R2m, and a small investment portfolio (due to recession).

I suggested they buy two properties for cash if money allows, in a student accommodation area as I think this is where you have the least problems with not getting occupants, and the best service from property agents with regards to them handling all the affairs with occupants etc.

I further suggested they reinvest the money received from the rent (about R8 000-R10 000 net) into a unit trust. In that way, they will spread their investments among different instruments.

Is this a good idea or not? Or should all the money be invested in, say, a retirement annuity (RA)?

Jan-Carel Botha, financial planner at Ultima Financial Planning, responds:

I can see from your reasoning that you definitely know some fundamentals of investing, but my answer to your question is as follows:
 
When looking at any investment there are two main considerations: firstly, the investment vehicle.

This means what form should the investments be? You mentioned three possibilities in your letter already, namely unit trusts, RAs and direct investment – in this case direct properties.

There are other options too, like endowment policies, sinking funds, pension funds, etc. The main considerations within this decision are income tax, liquidity and management.

Thus, to use the properties as an example, how will they affect your parents’ income tax (I guess severely), how liquid are the investments if they need to have some or all of the capital back (with direct property it's very limited) and will they want to manage the property, even with an agent doing most of the work?

Secondly, asset allocation.

The question here is how hard the money must work to achieve your parents' desired retirement. This implies a calculation being done on what real return (return above inflation) the investments must yield for the years to come.

Once you have done this calculation, you can start to figure out the asset allocation appropriate for them. Asset allocation means the combination of shares, bonds, properties and cash within the investments.

How you combine these assets will ultimately be the key driver of investment growth.

My advice would be to be very careful to not just jump to a couple of investments - like property and unit trusts - that you are familiar with and have experience of, but to consult with a professional on these key decisions, calculations and other options before making your final decision.

Remember, 15 years to retirement is very limited and they can’t afford to make many mistakes as this is the base of their retirement funding.

 - Fin24

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