I’m 75 with R2.5m. Which low-fee, low-risk investments should I consider?

I am 75 years old and have R2.5 million to invest. My current bonds and cash and small stock portfolio investments are supplying sufficient funds for our monthly needs. We have no debt and own our own life-right property. We obviously would like to have the lowest fees and easily accessible low-risk investments. We don’t want to be locked in for more than a year and would like to have a monthly drawdown to top up our savings account. Tax is not the most important option. Suggestions, please? 

Dear reader,

Thank you for your question.

According to the information supplied, we would suggest investing this money into unit trusts, from which you may take a monthly withdrawal to augment the income from your savings account. Unit trusts offer flexibility in terms of regular drawdowns, among other benefits. Additionally, we would like to bring to your attention that, withdrawals from a unit trust investment coupled with portfolio rebalancing or switches could potentially trigger capital gains tax.

Given your age, investment objective, near-term investment horizon, and moderate risk tolerance, we would further suggest allocating the bulk of this income, roughly 75%, into income funds with the remaining portion spread between risky funds. This will enable the investment to grow while offsetting the monthly drawdowns, fees, and related costs.

Being overly cautious could potentially work against your investment goal of capital growth that keeps pace with inflation, and you may run the risk of missing out on the equity market appreciation that provides higher returns than income funds.

Depending on the envisaged drawdown rate, we would also suggest drawing from income funds to allow the income portion invested in risky funds to grow undisturbed. The balance between income funds and risky funds cushions the investment from frequent income drawdowns and also steers overall portfolio growth.

The table below depicts a fund mix with a 75% allocation to income funds and 25% allocated to risky funds. Performance is as at 31 July 2022:

  • Please note that the above fund mix is for illustrative purposes only, and thus should not be construed as advice. We urge you to speak to your financial advisor for a more detailed fund mix recommendation.

On the basis of market movements which may be either up or down, assuming this income and your savings account are your only source of income, we normally suggest a modest income drawdown of between 4% to 6%, on a real rate of return basis.

This is so that you do not experience a situation of capital erosion in later years due to either an increase in life expectancy or a decrease in mortality rate.

Note: the real rate of return is the difference between the nominal rate of return and the inflation rate. The real rate of return is an important rate to take into account when making regular withdrawals from an investment, since it has a significant impact on the rate of growth of your investment after accounting for the monthly withdrawals.

Finally, in order to get the lowest fees possible, we suggest discussing prospective areas for fee negotiation with your financial planner.

We do hope the above suggestions help in making an insightful decision concerning your investment.

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