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How do you draw income from life-long retirement savings so that you have enough to spend on a comfortable lifestyle – and enough left working for you to cater for later years? That’s one of the most vexing questions you will face when you retire because a mistake could easily shatter your dreams.
Popular Biznews.com blogger Stefan Keeve, of Seed Investments, offers a sensible guide for people contemplating some of the most important financial decisions they will ever make. He sets out your main options when choosing where to invest your retirement savings. He notes, too, that it may not be a good idea to take your tax-free lump sum as this could knock your retirement assets.
Stefan has produced some sobering graphs, showing how long you can expect your money to last. If you haven’t really thought about your retirement, Stefan’s article is likely to shake you into saving more than you were anticipating. Wealth preservation is important, but you only need to bother about this if you’ve amassed a large pot of assets in the first place. – JC
By Stefan Keeve
Wealth preservation: Structuring your income at retirement
This week we take another look at how to optimise your investments given the current legal and regulatory environment.
Retiring is one of life’s major events. In a way it is the culmination of your years spent at the grindstone and finally being able to fully enjoy the fruits of your labour. The road to retirement is filled with planning saving and compromises and, if not structured correctly, could lead to problems.
The 1st decision the near retiree needs to make is whether to invest your compulsory assets in a living annuity (ILLA) or to buy a guaranteed life annuity from a life insurance company. The difference is one I’m sure most readers would be familiar with; the value of the ILLA at any time is a factor of the capital invested, the percentage drawn out as an income, and the performance of the underlying investment, while the guaranteed annuity is a fixed payment for the rest of your life.
You are able to withdraw 1/3rd of your pension fund and retirement annuities in cash (provident funds can be taken fully in cash) at retirement but, because of taxes on the lump sum option, it requires some thought as to what amount should be taken.
Another source of capital should be your discretionary assets, the assets that fall outside your pension and provident funds and retirement annuities. The assets that fall under this category will, for the purposes of simplicity, be limited to local and offshore unit trusts and share portfolios. Owning a large pool of these assets can be beneficial to you thanks to favourable tax treatment of these assets on disposal. When drawdowns are made out of this asset pool you are taxed on your capital gains and dividends received. The taxes on discretionary drawdowns are in most instances less than on your compulsory assets. The below charts show how long R5m would last if you needed R20 000 per month as an income from either discretionary or compulsory assets:
Drawdowns from compulsory:
Drawdown from discretionary:
Wealth preservation: compulsory vs discretionary assets
The difference is because the compulsory assets require you to draw a higher gross amount to still get the same amount out net of taxes. The liabilities line in the graphs refers to the amount of assets needed in a tax free world at any time to fund your drawdowns of R20 000 per month.
The logical conclusion would be to keep your compulsory asset drawdown to a minimum and take the balance from your discretionary assets, but keep in mind that you can draw R104 611 (excluding rebates) annually from your compulsory assets without incurring tax and depending on your age receive annual rebates. You also have a R30 000 per year exclusion from the gains on your discretionary assets. It is therefore imperative to structure your assets before retirement in such a way as to take maximum advantage of both these annual tax benefits when you retire.
Conventional advice would usually be to draw the minimum of 2.5% per annum from your compulsory assets and the balance from your discretionary assets. This is in no way a one size fits all solution and should be tailored to fit your unique financial circumstances. At Seed we believe this decision materially impacts your financial situation and we make every effort to ensure we ‘stretch’ your assets as far as possible into the future.
Stefan joined Hereford in 2012 from Maitland where he was employed as an Institutional Client Accountant. He obtained his B.Com (Hons) in Financial Economics and Investment Management in 2010 and is currently studying towards his CFA designation. He consults to private clients by formulating investment strategies and implementing portfolios.
For more on wealth preservation and wealth creation by Stefan Keeve, read:
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