What is a sustainable drawing rate in retirement? | Fin24
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What is a sustainable drawing rate in retirement?

Nov 14 2016 16:41
Liesl Peyper

Cape Town - A Fin24 user has an amount of R2.5m to invest from which he needs a monthly income of R17 000. He wants to know how he should invest the funds. 

Jabus van Aswegen of NFB Private Wealth responds: 

In order to provide a client with sound financial advice, it is vital to have an in depth understanding of his or her comprehensive financial position. 

The following information - current assets and debt; income and expenses; tax efficiency; investment portfolio composition; estate plan provisions and risk tolerance - would help formulate a tailor-made plan that would suit the client’s specific needs.

Due to absence of the above-mentioned data, it must be noted that the inquiry will be dealt with in isolation. 

The longevity of your money is the most important consideration you should take into account when investing in an income-generating portfolio. 

Your income needs, which directly affect your drawdown percentage, play a role in determining the longevity of your money.

The following factors should be considered when constructing an income-generating portfolio:

- volatility of the assets generating the yield
- tax liability on the yield/return
- would there be capital growth in line with inflation?
- would the drawing rate on the portfolio be higher than inflation?
- the liquidity of the assets in which you invested

A monthly income of R17 000 on a R2 500 000 portfolio represents an 8.16% annual drawing rate. Taking all investment costs into account and adding to that annual inflation (estimated at 7% presently), would require your portfolio to return in excess of 15% per annum to sustainably draw such an amount, increasing annually in line with inflation. 

It is not very realistic to expect a return of 15% in current market conditions. It would also mean you’d have to invest in an aggressive portfolio which mainly invests in equities that do not guarantee you a return of 15%. 

When investing in an aggressive portfolio you must be able to withstand times of high volatility and uncertainty, which can lead to capital loss.

The assumptions are as follows: 

- a 10% yield per annum
- a R2 500 000 lump sum investment
- a R17 000 income per month
- 7% inflation
- monthly income increases yearly in line with inflation

Based on the above assumptions: 

Your capital will be depleted after 16 years leaving you without an investment to draw income from.

It would be better to invest the lump sum in a lower risk investment and adjust your drawing rate a bit lower so that your capital lasts longer.

If you can source income from other avenues and adjust your drawing rate downwards your capital will last longer, or it may even show capital growth over a longer term.

As the above cannot be construed as official financial advice, it would be in your best interests to contact a certified independent financial adviser who would be able to conduct a full analysis on your financial position and goals. Such a professional would also provide guidance with regard to your entire financial plan and risk profile.

* Jabus van Aswegen is a paraplanner and adviser under supervision. He has a Bachelor of Commerce (BCom) in Accounting and Investment Management from Stellenbosch University.

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.

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