If you have investments other than regulated investments, these can easily be turned into income – for retirement or just as a top-up. But sometimes they come with their own problems – like more complicated tax.
Once you have maxed out your tax deductions on your regulated retirement investments, it’s time to start diversifying your pot, locally and offshore. In the next in this series, I am going to go into offshore in a lot more detail, so let’s just focus on local for now.
When it comes to local investments that can produce income, we are actually much luckier than our developed-world counterparts. There are two key things that factor into how ‘rich’ that income can be – the prevailing interest rates (set by the central bank) and the bond rate, usually supplied by the Treasury, but the yield is ruled by the market. These two rates are similar but not the same.
Bonds from emerging countries like ours require a ‘risk premium’ over our developed nations. Historically, emerging and third-world countries are known to default on their sovereign debt from time to time, and sometimes with alacrity. The worst offenders are South America, but Russia, Ukraine and Greece are all in the mix RSA has defaulted 3 times in recent-ish history, all before 1994 (’93, ‘87, ’83). Bonds, how the yield and capital move with markets are not easy to understand, but what is important for investors to understand is that they yield cash as a ‘coupon’. In RSA they payout twice a year.
When you get ‘income’ from an investment, you probably don’t know (or care) how the cash gets into your account, but it can be important, especially in ‘flexible’ investments. On one end of the spectrum, your income could come from a money market account, but in the retirement space it is more sensible to have something more diversified. The same ‘prudent’ rules should apply to this investment as to your formal retirement fund, which I have discussed at length in other parts of this series. In other words, somewhere around 4,3% pa (in RSA).
One problem I keep coming across in my practice is retirees who have a ‘top-up’ flexible investment, say in a savings account or even retail bonds, and use that interest to top up their income. That works fine for the first couple of years, but eventually inflation will eat into the interest income that looked fine 3 years ago. To do this properly, you need the discipline to reinvest at least half of that interest back into the capital so your income can grow over time and you can reset it annually. I deliberately didn’t include exact values here; everyone’s income needs are different. It bears repeating – even if you’ve never done so before, at retirement, when you’re switching your investments from growth to producing income, please get professional financial advice. Mistakes made at this juncture often cannot be undone, and you may not have the ‘active income’ anymore to fill the gap. While I’m busy repeating myself… please watch for ‘upfront’ fees charged by brokers (usually working for insurance companies) on your lump sums; these can put a nasty hole in your investment before you’ve even started.
If you’ve been reading my posts for a while, you’ll know that my preference for most investments over a critical mass is to use a bespoke portfolio. One of the biggest reasons for this is so that we can ‘harvest’ the cash that falls into the portfolio – interest, coupons, dividends, REIT rental income, etc. – and pay that over to you directly. If you use funds (and there is no getting around that in some investments), then bits of those funds have to be sold to generate the liquidity (and may trigger Capital Gains Tax).
Story time on why you need to know just how your income is being produced… A widow inherited stocks from her late father and then husband, but never personally traded stocks in her lifetime. Stocks/Shares produce income, real cash flow, by way of dividends. In RSA, at the moment, that is around 4,3% (after dividend withholding tax), which is way higher than you get in the developed countries, where it is closer to 1,5%. You can, of course, structure your stock portfolio to hold higher-dividend stocks. She had given her stockbroker instructions on an amount she wanted a month, and they duly did that. After a few years, she couldn’t understand why her capital was depreciating, and her CGT bill was climbing. Of course, the stockbroker had to sell shares in months when dividends didn’t meet her needs, which was most of the time. The solution? A diversified asset portfolio (over time) that had (higher) income-producing assets, not just shares. Almost immediately, the capital erosion stopped and started growing again, and she still got the income she needed.
In short, having a flexible investment to add to your retirement is smart, but don’t assume it’s as easy as a savings account or retail bonds. I am still offering a free 30-minute video consultation to any pre- or post-retirees who want to chat through their specific concerns.
Articles and Blogs:
Investment series part 5 (NEW)
Investment series part 4 (NEW)
Investment series part 3
Investment series part 1
Investment series part 2
Legacy Series Part 4
Legacy Series part 3
Legacy Series Part 2
Legacy Series Part 1
Holiday checklist
Next year – Action Plan
Next year – Vision, Mission etc
Medical Risk Mitigation
Next Year – Consolidation
Abdication or diversification?
Carbo-loading your retirement Spoiled for choice
Who needs a plan anyway
8 questions you need to ask about retirement
What to do when interest rates drop
How to survive volatility in your investments
What to do when interest rates drop
Difficult Financial Conversations
Financial Implications of Longevity
Kick Start Your Own Retirement Plan
You matter more than your kids in retirement
To catch a falling knife
Income at retirement
2025 Budget
Apportioning blame for your financial state
Tempering fear and greed
New Year’s resolutions over? Try a Wealth Bingo Card instead.
Wills and Estate Planning (comprehensive 3 in one post)
Pre-retirement – The make-or-break moments
Some unconventional thoughts on wealth and risk management
Wealth creation is a balancing act over time
Wealth traps waiting for unsuspecting entrepreneurs
Two Pot pension system demystified
Cobie Legrange and Dawn Ridler,
Rexsolom Invest, Licensed FSP 45521.
Email: cobie@rexsolom.co.za, dawn@rexsolom.co.za
Website: rexsolom.co.za, wealthecology.co.za