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Retirement fund question

Kamikaze

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Hey fellow Carbonites. I hope someone with finance investment knowledge can provide me with some insight. Google is being useless; it's like no one has a retirement fund.

My parents retired recently and gathered up a retirement fund over the years. The funds were invested at one of the big investment companies of South Africa. They opted to invest the entire amount and live off the interest. They can not touch the invested amount and it will only be made available once they pass away. I took a look at how much interest they're earning per month and was shocked at the low amount. It's about 40% less than I'd expected. My dad just accepts the amount and won't query or fight with them to get clear answers.

So here I am to try and understand whether the interest they're earning is accurate or whether they're being fucked over. Lets say as an example they have R1 million invested, how much can they expect to earn in interest each month?

Thanks!
 

Erohann

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On another note, I hope that received 'salary' from interest will increase as cost of living, inflation, etc, increases. Else they will be running into a wall eventually as life gets more expensive but their income is stagnant.
 

Bincx

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Hey fellow Carbonites. I hope someone with finance investment knowledge can provide me with some insight. Google is being useless; it's like no one has a retirement fund.

My parents retired recently and gathered up a retirement fund over the years. The funds were invested at one of the big investment companies of South Africa. They opted to invest the entire amount and live off the interest. They can not touch the invested amount and it will only be made available once they pass away. I took a look at how much interest they're earning per month and was shocked at the low amount. It's about 40% less than I'd expected. My dad just accepts the amount and won't query or fight with them to get clear answers.

So here I am to try and understand whether the interest they're earning is accurate or whether they're being fucked over. Lets say as an example they have R1 million invested, how much can they expect to earn in interest each month?

Thanks!
It is not clear from the above, but I am assuming they purchased an annuity plan the investment company? Meaning the annuity plan is paying them a monthly or annual income? Do you perhaps know whether it is a Living Annuity or a Guaranteed Annuity or some form of composite (which is a combination of the two). You welcome to PM me privately or here.
 

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It is not clear from the above, but I am assuming they purchased an annuity plan the investment company? Meaning the annuity plan is paying them a monthly or annual income? Do you perhaps know whether it is a Living Annuity or a Guaranteed Annuity or some form of composite (which is a combination of the two). You welcome to PM me privately or here.
Maybe you could share your insights/understanding on what a Living Annuity and a Guaranteed Annuity is for us plebs?
 

Kamikaze

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It is not clear from the above, but I am assuming they purchased an annuity plan the investment company? Meaning the annuity plan is paying them a monthly or annual income? Do you perhaps know whether it is a Living Annuity or a Guaranteed Annuity or some form of composite (which is a combination of the two). You welcome to PM me privately or here.
According to my dad it's not a policy that would be placed on the jhb stock exchange, but more like a Guaranteed/more stable Annuity (if it makes any sense). I should be able to provide you with the company details and the specific investment plan if it will help to get a better idea on what they should be expecting.
 

PJtheKILL3R

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Maybe you could share your insights/understanding on what a Living Annuity and a Guaranteed Annuity is for us plebs?
Bincx will probably give you the full monty the TLDR here is:
Living Annuity = Your money is invested in assets and you get to draw down between 2.5%=17.5% of the capital P.A (If you die the remaining capital goes into your estate)
Guaranteed annuity = A Insurance company takes all of the capital and promises to pay you X amount per month/quarter (adjusting for inflation) until you die, so essentially they are taking a bet that you won't live as long as you think you will.
 

Bincx

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Bincx will probably give you the full monty the TLDR here is:
Living Annuity = Your money is invested in assets and you get to draw down between 2.5%=17.5% of the capital P.A (If you die the remaining capital goes into your estate)
Guaranteed annuity = A Insurance company takes all of the capital and promises to pay you X amount per month/quarter (adjusting for inflation) until you die, so essentially they are taking a bet that you won't live as long as you think you will.
This explanation is perfect :)

The fact that he mentioned that they only get access to the investment amount when they pass away means that it has a Living Annuity component or there is some form of guarantee on the Guaranteed Annuity --> or maybe a combination of the above.

According to my dad it's not a policy that would be placed on the jhb stock exchange, but more like a Guaranteed/more stable Annuity (if it makes any sense). I should be able to provide you with the company details and the specific investment plan if it will help to get a better idea on what they should be expecting.
You welcome to PM me the company and plan name and I can look into it.
 

Bincx

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No problem. Will try my best to assist.
The first step is figuring out exactly what they have...
 

Error

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I don't really know what I'm talking about, I just like rambling sometimes, but typically...

Living annuity
Pro: You can adjust the drawdown rate (income)
Con: You can run out of money if markets are bad, drawdown too fast on, or outlive the invested amount
Pro: Remaining money at death goes to your estate
Pro/Con: You have some options in what investment portfolio the money are in

Life annuity
Con: You can't adjust drawdown rate (income)
Pro: You are guaranteed an income
Con: Remaining money at death stays with investment house
Pro/Con: You don't have options in what investment portfolio the money is in

You first mentioned they only have access to the full funds at death, which is typical of a Living annuity as the full amount remains "yours", then you mentioned a set annual increase of 5%, which is typical of a Life/Guaranteed annuity as "the house" determines and controls the amount to be paid. The combination sounds like it's a newer combination scheme offering, your use of the words "more stable" rings the same as a product I know "Stable Bonus Portfolio", and coupled with mention of not so great interest (investment?) returns... I'd take a stab at something like Sanlam's "Investment-Linked Lifetime Income Plan". Link for some overall reading and reference, but see product info on far left: https://www.sanlam.co.za/personal/retirement/Pages/retirement-income.aspx

That type of combination or a Life annuity I don't think would ever work for me personally, but each person's circumstance must be considered on their individual needs. For me there is trickery in the fine print about a guaranteed payment period where they will continue to pay an income if you die within the first x amount of months, but only for x amount of months, then the rest they keep, unless there is a second insured (at a price), or spouse reversion. They employ actuaries to track mortality rates against your "guaranteed" payment period, second insured's lifespan or reversion on to them, and all in order to remain profitable - so it is all smoke and mirrors and ultimately "the house" always wins in those two scenarios.

Without knowing what they've taken it's quite difficult to guess... I'm interested to hear what they opted for though!

Going back to two other points;
- A stable portfolio at retirement is actually the recommended approach; your risk and market exposure during your lifespan should be on a sliding scale; risky when young as you ride the waves you'll gain more in the long run, smooth and stable when older as you can't weather the troughs as you're out of time.
- You speak of your parents having retired together, and monies becoming available when "they" pass away. I'm not aware of any retirement annuity that would allow two people to contribute jointly, be legally owned by both individuals, and then to purchase an annuity jointly. I can only think that perhaps if one person put monies away under their own name, then purchased an annuity under their own name, and decided to incorporate a spouse at an extra risk cost like that in the Sanlam product above, it could work as "they". Some clarification on this one would be great.

Some other considerations;
Fees, and most likely obscure (because hidden is technically illegal); administration, investment, risk, broker.
The tax you would owe on an annuity versus say a money market account.
 

Recho

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So short of knowing the exact nature of their investment as indicated above, to give you a ballpark regarding interest:

A million rand at 7.75% per annum will give you about R6500 interest a month. Considering half of the annual amount will be subject to tax should they have any other income and the income breaches +- R200 000 a year.

But I seriously doubt this money is sitting in a standard interest bearing account as indicated above.
 

Erohann

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There is a 5% annual increase so that should hopefully be enough :)
Is the monthly payout which is created from interest on the capital? Does this imply the capital is also growing to sustain the increased returns? I would assume 5% might end up falling short. Aside from unexpected increases with new taxes, levies and rampant fuel prices etc, there are also unexpected expenses as you age after retirement, often health related, needing frail care, a walker, hearing aid, adjustments to home for ease of mobility and so on.
 

SCHUMI4EVER

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All I'll say is it sounds like they opted for a very safe plan and therefore will be getting a fair bit below market return. Which may account for why you feel its lower than expected. Either way it doesn't sound as if much can be changed though.
 

SauRoN

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It sounds a bit like it's a kind of all in one deal in a very low risk (possibly no risk) investment that also guarantees or even grows the capital balance to leave it behind for someone else when they die.

A bit silly to do that if you are struggling day to day, but I guess their goal is to leave something behind.

The moment no risk is involved the returns are low and if they are maintaining the capital balance that further lowers it so things sound about right.

Ultimately you'd need to see the exact numbers and agreement to make real sense of it.

Safe is not necessarily bad, I know many many people who didn't take safe options and really really suffered the last few years when everything took a major dip. They are only recovering now and things are looking up.

Some actuary probably did some pretty good home work on this to make it last.
 

PJtheKILL3R

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It sounds a bit like it's a kind of all in one deal in a very low risk (possibly no risk) investment that also guarantees or even grows the capital balance to leave it behind for someone else when they die.

A bit silly to do that if you are struggling day to day, but I guess their goal is to leave something behind.

The moment no risk is involved the returns are low and if they are maintaining the capital balance that further lowers it so things sound about right.

Ultimately you'd need to see the exact numbers and agreement to make real sense of it.

Safe is not necessarily bad, I know many many people who didn't take safe options and really really suffered the last few years when everything took a major dip. They are only recovering now and things are looking up.

Some actuary probably did some pretty good home work on this to make it last.
The sad thing is, some retirees end up at retirement with not nearly enough in savings, and they are forced by circumstances to take the maximum allowed (17.5%) drawdown of their pension, obviously at that rate, you would essentially have a goodish income for a measly few years and then you will be broke poor with 0.

The math is quite simple if you have enough money saved up:
Drawdown rate = Investment return% - inflation%
If you stick to that one simple rule (Other people like to use the 4 percent rule) you will never ever, even if you live into infinity, run out of money.
 

Kamikaze

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Thank you everyone for your valued input! To give you some more info, this is what I know:

- Investor: Alexander Forbes
- 5% annual increase
- Low risk/consistent income per month
- Not invested on the JHB stock exchange (coincide with the previous point I guess)
- Only my dad's retirement funds are invested in this plan
- Income per month consists only of the interest gained. The original amount remains untouched
- Original funds may not be withdrawn. Will go to the estate when my dad is deceased.

So short of knowing the exact nature of their investment as indicated above, to give you a ballpark regarding interest:

A million rand at 7.75% per annum will give you about R6500 interest a month. Considering half of the annual amount will be subject to tax should they have any other income and the income breaches +- R200 000 a year.

But I seriously doubt this money is sitting in a standard interest bearing account as indicated above.
This was basically the expectation I had of R6500 in this example. Currently he's getting R4100 comparatively before tax. If this is the expected case, then what's the point of retirement plans like these? Excuse my naivety, but why not just chuck the funds in an interest bearing account at a bank?

Again, thank you all for your input. I highly appreciate it!
 

Erohann

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This was basically the expectation I had of R6500 in this example. Currently he's getting R4100 comparatively before tax.
Unless he has another source of income, is this enough to be taxable even?
 

Erohann

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