MONEY CLINIC | I have R5m to invest. What are my options to ensure a salary of R30 000?

A Fin24 reader who has inherited R5 million in a savings account is looking to invest to ensure a monthly payout of R30 000, of which would be reinvested. She writes:

I have about R5 million sitting in a traditional savings account which I have inherited. I have a paid up property as well as R1 million distributed between my and my daughter's tax free savings, educational policies, retirement annuity and endowment policy. I am 40 years old so retirement is a bit further off for me. I wish to invest the R5 million rand so I can get a salary of about R30 000.

I understand that the R5 million value will go down over time, but from the R30 000 I will be investing some of the money back so as to increase my net worth. My problem is I am not interested in investing in property. I have considered the RSA retail bonds and perhaps shares, but I am not sure which route to take.

Michael Rossouw, Senior Investment Consultant at 10X Investments, answers:

I am going to leave the paid-up property and R1 million alone and presume that you are making the most of the tax relief available to you via your retirement annuity and tax-free savings account. If you have any doubt about this, talk to an expert, because paying unnecessary taxes, like paying unnecessary fees, is a sure (and unnecessary) way to undermine your wealth.

As for the R5 million, as you correctly stated, R30 000 per month is not a sustainable amount and your capital has a high probability of eroding over time. You can get an idea of a sustainable income from your capital by using this calculator.   

A unit trust is a popular investment vehicle to provide a monthly income. Unit trusts provide you with liquidity (access to your capital) and flexibility to choose how the money is invested. On the downside, the growth (income) can be taxed and there can be multiple fees involved.

Within unit trusts there is a lot of choice. Once you have selected a unit trust, you will need to decide which funds to invest in. Different funds invest in different assets, from cash and bonds to property and equities (shares), both locally and abroad.

Some unit trusts focus on investing in bonds, while others focus on the higher risk, potentially higher return world of equities. Yet others still diversify (and lower your risk) by investing across all investment types, both locally and abroad.

You will need to select your investments based on your personal circumstances and goals, as well as your appetite for risk. Different investments generate different types of incomes, which also attract different levels of taxation, which you will want to factor into your choice.

There are three types of growth (income) from unit trusts: 

• If your unit trust holds cash, it will generate an interest income. Interest income is taxable but, every investor qualifies for a tax exemption up to R23 800. For those who are 65 years old or older, R34 500 qualifies for tax exemption.
• Equity investments generally generate dividend income, which will be paid to you after tax of (only) 20%.
• Capital in a unit is expected to grow. The growth (your gain) will attract capital gains tax. An annual exclusion of R40 000 capital gain is granted to an investor when an investment is disinvested, house is sold etc. On capital gains above that R40 000, only 40% is liable for tax, meaning a further 60% of your capital gain is exempt.

Another choice you will need to consider is between active and passive fund management. Simply put, active managers pick individual stocks, effectively taking a bet that they can select the winning stocks of the future. Index fund managers, on the other hand, buy a small slice of the market as a whole and focus on keeping costs low.

There have traditionally been strong opposing views, but increasingly the global investment community is following the wisdom of the great investors of our time, including Warren Buffett and Jack Bogle, and buying a slice of the whole market at a low cost.

Cost is an important factor that you should focus on. This is an area where many investors could improve their outcome significantly. Costs include advisor/broker costs, administration/platform costs and investment management/fund management costs, which can amount to up to 3% per annum at the more expensive end of the spectrum. A lower charge can amount to a significant saving on an an investment of R5 million. 

You can select the right investment vehicle and the right asset allocation, but it can all still go horribly wrong when there are high costs involved. 

Questions may be edited for brevity and clarity.