Video: What is a lump sum worth when it comes to income?

When we look at our retirement funding as a lump sum it may seem like a lot of money – until you realise that it represents your entire future income.

If you retire at the age of 60 and you live until 80 – which is relatively young – you need enough to pay for 240 paycheques. If you received an income of R20 000 per month which grew at the rate of inflation, you would receive R4.8 million over that period.

To provide an illustration of how much a lump sum of R1 million on retirement can give you as an income, we assumed a male retiring at age 60 with a spouse who is four years younger than him.

The first example is a joint life annuity which means that his wife would continue to receive the income should he pass away first. For every R1 million of pension, he would receive an income of around R4 500 per month guaranteed for life, increasing by 5% a year. In order to have an income of R20 000 per month, he would have to have at least R4.5 million at retirement.

In the second example he uses a market-linked living annuity and draws down 6% of the capital each year, which is the maximum recommended drawdown. A fund value of R1 million would provide an income of R5 000 per month, so he would need a lump sum of R4 million on retirement to give him R20 000 per month. Depending on market returns his income should increase with inflation until the age of 82 when his capital starts to erode, which means his wife would also experience a reducing income if she outlives him.

You need to get good advice well ahead of retirement. Don’t just look at the fund value and believe that it will be enough.

7 CommentsLeave a comment

  • I am 55 years old and using my pension fund ( paying extra funds into it) as well as Investments at bank as savings. Will these type of savings be enough to supplement my pension? I do not want to take any risks.

  • Dear Ms Fisher-French,
    A) do you think that in SA it would be a good idea to buy an apartment/s and rent this out and then collect the rent income in retirement?
    1. Can I invest offshore in a Retirement Annuity (RA) ?
    2. if I can, how and where do I invest in a offshore RA?
    3. An can I move the capital 100% at 55 or 60 to a offshore living annuity?

    Also, on a personal note: do you give presentations for women on money matters, if so, where and when? I would love to meet you and have these discussions with you face to face.

    • Hi Rozanne
      Property is used by some people to create a retirement portfolio. keep in mind that there are many risks including tenants who do not pay or having an empty property. But if you manage these and understand the market and investment, it can provide a retirement income.
      The laws in SA limit retirement funds to a maximum of 30% offshore and 10% into the rest of Africa.
      You can invest more offshore, but it would be part of your discretionary money – ie: you would not get the tax benefit offered by a retirement annuity, but on retirement you do not have to convert into an income annuity.
      You can theoretically invest in a LA offshore but as far as I know only Sable International offer at this stage. It is only recommended if you are living abroad – the currency fluctuations would make it difficult to manage the income locally.

  • Hello Ms Fisher-French,
    I have a pension fund at work that is with Alexander Forbes, can I make this a Joint Life Annuity?

Leave a Reply

Your email address will not be published. Required fields are marked *

Join the Maya on Money weekly newsletter

Join the Maya on Money weekly newsletter

For updates that impact your day-to-day money decisions.

You have Successfully subscribed. Please check your inbox to verify your subscription.