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Investing in a spouse's name for retirement

Nov 08 2016 18:46
Carin Smith

Cape Town - A Fin24 user has an amount of R6m and wants to know what kind of income he would get for retirement. He writes:

With an amount of R6m, what kind of income will I have for retirement? And what would the monthly tax be on my income?

Will it be wise to invest money in my wife's name and the she draws about R10 000 income every month?

Ebrahim Moola of independent financial advisory Bobat’s, responds:

I must start off with a disclaimer. It is vital that you meet with a savvy financial adviser who will review and understand your overall financial situation. Only once all the key variables are understood can an appropriate recommendation be made.
    
Nevertheless, I will make a few assumptions regarding your position:
    
The R6m belongs to you in your personal discretionary capacity, net of any taxes.

You wish to retire today at the age of 60 and will use the entire R6m to fund your retirement living expenses.

You’re a moderate investor and don’t mind fluctuations in your portfolio value as long as you can keep withdrawing the required amount to fund your monthly expenses.
    
There are a few options for you when it comes to funding retirement income. I’ll describe three recommendations here:
 
Guaranteed annuity (riskless option 1)
 
The guaranteed annuity is an insurance product that guarantees to pay you a specified monthly amount for the rest of your life.

This effectively insures you against longevity risk (the risk that you live longer than expected) as well as investment risk (using up your money too soon due to poor investment returns).

This income is paid to you until you die. The drawback is that your money dies with you, and no money passes onto your heirs.

However, you can choose a guaranteed annuity that guarantees to pay for at least a certain number of years, even after your passing. This added feature, however, results in a lower income level.
 
Life assurance companies consider a number of factors in determining your guaranteed annuity income, including your age (the younger you are, the longer you are likely to live, the lower your income), your gender (women have a higher life expectancy than men, therefore, receive a lower income), interest rates (the higher the prevailing interest rates, the higher your monthly income is likely to be) and additional features (the more features you have, the lower the regular income).

For R6m, assuming you are a male aged 60 years old, you could purchase an annuity that pays you a monthly income (after tax) of R27 553 that grows at 6% per annum until your death.

The above number is a rough estimate provided by Sanlam using the assumptions detailed above without any features.
 
Capital protection option (riskless option 2)
 
This option is a combination of life cover and a guaranteed annuity. You will earn a regular income from the guaranteed annuity portion.

However, the income would be slightly less than a stand-alone guaranteed annuity as a premium for the life cover is deducted from it.

The R6m life cover would be paid out to your beneficiary upon your death.

So, your R6m lump sum doesn’t die with you like the guaranteed annuity described above.

Based on a quote I’ve received from Sanlam, you can expect an income of R16 276 per month after tax (which increases annually at 6%).
 
Market facing investment portfolio (riskier route)
 
With this option, you have to decide how to invest your money (together with a financial advisor of course).

It transfers the responsibility of securing an adequate income for the remainder of your life onto your shoulders, so you are taking on both investment and longevity risk with an investment portfolio.

With this investment, your nominated heirs inherit whatever is left of your money after your death (your remaining capital does not die with you like a guaranteed annuity).
 
The 4% rule is a prudent way of calculating the regular income you could earn on your R6m lump sum in an investment portfolio.

So, 4% of R6m is R240 000. Divide this by 12 and you get a monthly income (before tax) of R20 000 per month.

Assuming the R6m is invested in a moderate risk portfolio (with an inflation plus 3% target), you should comfortably be able to draw an amount of R20 000 per month for the rest of your life without running out of cash. In fact, if your portfolio performs in line with its target, you should have a healthy amount left to pass on to your heirs upon your death.

You could also choose to increase the R20 000 per month withdrawal to combat the effects of inflation.
 
Donations to your spouse:
 
For tax purposes, donating half the R6m to your wife may be a wise idea as donations to spouses are exempt from donations tax.

She can then set up investments in her own name such that she earns half the combined income of R20 000 in year one.

Splitting the income between the two of you will result in a lower effective tax rate on the combined income (she will be using up her annual tax rebates allowed by Sars).

This decision, however, is dependent on her other income flows (if any), how you are married (in community of property for instance) and whether you trust her enough to not run away with your money!
    
* Ebrahim Moola CA(SA), CFA is an investment professional at Bobat’s (FSP 8201), an 86-year-old independent financial advisory business based in Durban.

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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investments  |  retirement  |  money  |  money clinic
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