While still seeing some capital appreciation as I grow my business over the next couple of years.
19 Jan 2023 00:32
I am 36 and have been offered a Voluntary Severance Package (VSP) by my company, which equates to R1.25 million before tax. I have a provident fund that currently equals R2.1 million and savings of R2 million split between RSA Retail Bonds, unit trusts and ETFs [exchange-traded funds]. Of this R2 million, R385 000 is in tax-free investments split between my wife and my allowance.
The tax directive has not been issued yet, so I cannot confirm the tax table that will be used, but I would like to assume that if I withdraw my total provident fund along with the VSP plus savings I will have R4.3 million after tax.
What is the best income I could receive from this capital while still seeing some capital appreciation? I will be looking to use this income while I grow my business over the next couple of years.
For any investment from which an income withdrawal is a specific requirement, the investment strategy is imperative.
Structure a combination of asset classes, including low-risk and low-volatility asset classes (cash and bonds) for short-term planning (zero to four years), and growth assets (equity exposure, both locally and offshore) for above-inflation growth for the longer term.
The growth asset component is very important as you not only need to outperform inflation, but also your income withdrawal, ensuring the capital lasts as long as possible.
The average targeted annual return for a diversified portfolio structured to deliver an income (either from an investment or in retirement) is 10% to 12% over the longer term.
We also need to take inflation into account. We can use a long-term inflation target of 6% per annum in this instance, although we are currently at an inflation high of 7.5%.
Our recommendation is not to withdraw more than 5% of your investment value to ensure the capital will remain in place as long as possible. That equates to roughly R17 916 per month.
Because of the nature of these funds, being post-tax, and because the funds will be invested in a voluntary investment, tax on income earned, as well as capital gains tax, will have an effect over the longer term and therefore needs to be calculated and considered.
You can, of course, withdraw more on a monthly basis, but should take into account that the capital will deplete more quickly – which in your case as a young person still planning to structure a new business and continue working is absolutely fine. Using the monthly income requirement, it can be calculated when your capital will deplete.
Your income requirement will however play a role in the recommended percentage allocation to equity exposure, as you will want to avoid having to sell out of equities if it’s not ideal market timing.
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