103 - How to get the best pension that lasts for your whole life

Question 

We have R2m invested in a unit trust income fund from which we are drawing R5 000 a month. I would like to increase this amount but do not want to run out of money in the future as we are pensioners - I am 81 and my wife is 78. What would you recommend that we do? 

Answer 

Managing your income when you are on pension is quite an art.  You want to get the best possible income from your capital, but at the same time, you do not want to expose your investment to too much risk as you have no way of topping up the capital. 

You need to avoid the two big mistakes that many retired people make: 

Mistake 1:          Invest too conservatively 

Many pensioners invest too conservatively when they retire and usually after 10 years, they find that their capital is not enough to meet their needs.  This is because pension inflation is significantly higher than the returns that their conservative portfolios have been producing. 

I recommend that pensioners split their investments according to when they anticipate needing access to the money.  A model I use is the following:

Mistake 2:          Draw too large a pension each month 

If you draw out more money than your investment has grown by once you have taken off the costs, then you will start using up your capital.  This can result in you running out of money in later years. 

A guideline that I like to use is one that was published by one of the industry bodies and is shown on the table below:

The younger you are, the less you should draw out of your investment as the money needs to last a lot longer.  Remember that when you use this table, you should base it on the edge of the younger spouse.  In your instance, your spouse is 78 so a drawdown of between 5.5% and 6% should be safe. The R2m investment would give you the following monthly incomes: 

You can therefore increase your monthly income to this level with a measure of confidence that you and your wife will not run out of money in your lifetime.

Life annuity 

A great way for pensioners to increase their income is to take out a life annuity.  Here you purchase a series of payments till the last of you and your spouse dies. 

Annuity rates are good at the moment and an investment of R2m would give you monthly income of around R21 500 for the rest of your and your wife’s lives.  This would be guaranteed and be payable till the last spouse dies, regardless of what happens on the stock-market.

Insider Tip: 

Should you ever need to move into frail care, consider using some of your investments to buy a life annuity as it does provide a really good income for older people.  

Recommendations 

I cannot make a recommendation without seeing more of your financial situation what I can do is recommend that you consider the following: 

• invest your capital according to the three pot approach
• do not draw down more than 6% of your capital every year
• consider investing part of your money in a life annuity