Limited retirement capital

images-57I would highly recommend that this reader engages the services of a recognised professional financial planner. The information provided here leaves many more questions than answers, so advice is difficult.

The individual has a residence which she rents at R3 000 per month. She has R400 000 from which she needs to generate the rental income.

Sadly R3 000 per month represents R36 000 per year, which requires an income yield of 9%. This may be possible by purchasing SA Retail Bonds, which are currently offering 9.25% on a two year fix, but this would leave her very exposed to inflation. That means that if her rental escalates she will be required to spend capital. Given that she is currently only 68, the need to invest with a longer term outlook to beat or match inflation is critical.

Investing in another property may be an alternative, but the illiquid nature of this asset plus the tenant risk she highlights may offset the benefit of an escalating rental. In addition maintenance and repairs also have to be factored in.

Another alternative is a listed property or real estate investment trust (REIT) unit trust or exchange-traded fund (ETF). These funds would invest in listed property stocks on the JSE that generate income yield and also have the potential for capital growth.

The downside here, however, is that while the tenant mix is more diverse, commercially-orientated and subject to increases in rental income, the daily volatility of a property fund due to share price movements may leave the investor very uncomfortable from a risk perspective.

As for a fixed deposit, while there may have been some negative press around a number of our banking institutions, I am doubtful that the big banks are in any form of a crisis. They are well funded and run and it is unlikely we will see one of them fail in the near future.

However, even though she may be able to get a fixed deposit that offers the required 9% interest, she will have the same inflation problem that a retail bond presented. Her income will not increase even though her rental probably will.

I see two other options that may or may not be viable:

The first is to generate further income. The possibility of generating additional income from employment may allow for less income to be drawn from the investment and then the possibility of investing in a more growth-oriented portfolio.

The second is to consider engaging with her family around generational wealth planning. While this is often avoided at all costs by retirees, the reality is that it often only delays the inevitable. It may be possible to merge her situation with what succeeding generation’s lack. Parents lack cash flow and children lack capital. By planning together, there may be scope for both parties to benefit in the longer term. Sitting down a with a financial planner who can help you to come up with a potential solution around this proposal is essential.

Beyond these options, there are unfortuantely no ‘silver bullet’ options for retirees who have not prepared adequately. Their stories should however serve as an incentive to younger generations to start saving more, earlier!