Share

How to maintain income on a R4m payout

A Fin24 user who is unable to work after an injury wants to know how to stretch his money to still generate a monthly income. He writes:

I'm 27 years old and got a compensation payout of R4m following an injury.

As I'm unable to work any more, how does one invest this to continue to grow and still generate R12 000 monthly payouts to cover expenses?

Andrew Duvenage of NFB Financial Services Group, a CFP® professional, responds:

First of all, we wish you well with your recovery from this incident.

Typically when providing investment advice we would consider dynamics including but not limited to your age, your income requirements, inflation and your tax profile. While this unfortunate event has forced you to stop working, you are still young and therefore can take a long-term view with your investments.

The drawing of R12 000 monthly on the capital amount of R4 000 000 represents an annual drawdown of 3.6%. Assuming an inflation rate of 6%, which is consistent with the latest figures and is the upper limit of the Reserve Bank's target, you would need to achieve a net return of 9.6% to ensure the real capital preservation of your portfolio in perpetuity.

Due to the fact that you are still young and have a long-term investment horizon, you should look at building a growth portion of the portfolio to protect yourself against running out of money.

Splitting the R4m into an income generating portion of R3m and a growth portion of R1m will assist with such a strategy. The R12 000 drawings (increasing annually with inflation) from the R3m investment would last to age 80, assuming a 10% net annual return and inflation of 6% per annum.  

Within that period (53 years), the R1m growth portion of the portfolio will have time to take advantage of the added returns exhibited by equity investments, as well as what Albert Einstein called “the eighth wonder of the world” – compound interest.

In terms of investment options, what could be appropriate is a linked unit trust, as the monthly withdrawals from such a product are not taxable as income, unlike annuities. The taxability of such an investment comes in the form of interest, dividends and realised capital gains.

Looking for a net return of 10% per annum within the income generating portion of the portfolio we would advocate a balanced type of mandate as these funds typically look to outperform inflation by 5% to 6%.

While we would not advocate taking more risk than is necessary, the fact you are still young and have a long-term investment horizon we would be comfortable with such an approach.

For the R1m growth portion of the portfolio we would look to use an equity-orientated investment strategy. However, due to the fact that local markets are currently trading at levels considered to be expensive, we would phase the investment in over a period of 12 months so as to reduce any volatility and benefit from rand cost averaging should markets lose value.

Tax implications

In terms of tax, balanced funds typically hold about 30% in interest yielding assets, and at a return of 7% per annum on these assets this would represent an annual taxable interest of R63 000, R23 800 of which is exempt.

Dividends are not taxed in an individual’s hands, but rather the dividend tax is withheld at company level on behalf of an individual, and capital gains are taxed pro rata in line with your drawings.

The effect of your annual rebates and medical deductions, assuming you have joined a medical scheme, would probably lead to you paying very limited tax on the investment drawings. The tax on the growth portion would only be payable when realising the capital gains at an event such as a withdrawal.

This cannot be considered formal financial advice and you would benefit from contacting a properly certified and independent financial adviser, who will be able to provide you with tailor-made advice for your entire financial plan.

- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.


We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.2%
Rand - Pound
23.90
-0.0%
Rand - Euro
20.43
+0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.1%
Platinum
908.75
+1.3%
Palladium
1,014.28
+1.3%
Gold
2,221.04
+1.2%
Silver
24.86
+0.9%
Brent Crude
86.09
-0.2%
Top 40
68,346
+1.0%
All Share
74,536
+0.9%
Resource 10
57,251
+2.9%
Industrial 25
103,936
+0.6%
Financial 15
16,502
-0.1%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders