Better late than never: starting an investment strategy

Q: I am 72 years old. Due to life’s difficult circumstances I used up all my life’s savings bar one last investment. Now I must figure out how to make the most of it.

All I have is my house which I can sell for R2.5m. A small portion of the mortgage, R400,000, which I rebonded a few years ago needs to be settled. There won’t be agents’ fees as this will be my last sale as an estate agent.

Please advise how I should use the remaining R2m, considering I need a place to live. Should I buy a small unit cash and invest in a living or life annuity? What can I do to make the admittedly way too small amount of money stretch as far as possible? I’ve been told that even at my age, I must find a small job for some extra money.

Concerned, Johannesburg via e-mail asks.

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A: Janet Hugo CFP®, director Sterling Wealth Group and FPI Financial Planner of the year 2018/2019, responds:

It takes great courage to ask these questions and begin to create an investment strategy, particularly considering life’s circumstances. I will offer a few thoughts and highlight some areas that you should be aware of before making a final decision.

Start by setting aside a portion of your capital for an emergency kitty. As I’m sure you already know medical aids do not cover all the expenses required to achieve diagnosis and ongoing care. This kitty could also be used for unexpected car and home repairs. Take a ruthless look at your budget and trim all unnecessary expenses.  

Any proposed investment strategy should be built around your budget requirements and life expectancy. According to data published by the life insurance companies, the current life expectancy for a woman age 72 is on average 94. Your investment strategy could include a substantial portion of your capital invested in a guaranteed annuity from a life company. These annuities are available for both retirement fund proceeds and voluntary investments, such as the capital from your home. The life insurance companies will guarantee to pay you a monthly amount increasing with inflation.   

Please ensure you only deal with reputable companies and long-term track records.

It is important to manage your expectations with regards to investment outcomes. An interest-bearing investment is not likely to offer much more than 1% to 2% above the long-term inflation average of 5%, therefore 6%-7% return in exchange for immediate access to your money. A low-risk investment return is likely to offer 3% above inflation when measured over three years. This translates into about 8% per annum in absolute terms.  

A high risk investment is likely to offer up to 7% above inflation but could also lose value over shorter periods. While this return of about 12% seems very attractive, these types of investments can have drawdowns of as much as 30% in any one year and take several years to recover. These projections are based on long-term data and hold true in most parts of the world.  

From the information that I have, I do not believe that you have much room for risk in your budget.  

Expending precious capital on another property makes less sense than looking for reasonable rental accommodation. Managing a disciplined budget will be key to the success of your retirement years.

You will need a professional person to guide you through this journey. I do strongly recommend that you consult with an independent Certified Financial Planner practitioner and stress the importance of only dealing with a reputable life assurance company.

Q: I have two children living in countries on other continents and when one renewed his SA passport it was renewed timeously and without question. His sister subsequently sent in her application with all the identical supporting documents and she received a letter stating that her citizenship had been revoked.

My query just for interest sake, does SA tax non-citizens? She does still have funds remaining in SA but not earning any significant income. 

B. Dean via e-mail asks.

A: Daniel Baines, a tax consultant at Mazars and author of How to get a Sars refund for small businesses responds:

I am not sure why her citizenship was revoked, as that is unfortunately not an area of law that I deal with. Her tax status, however, does not influence her citizenship.

SA does tax non-residents (that is non-resident for tax purposes) on South African sourced income. For example, if one of your children is not a tax resident in SA but is earning rental income in the country, this rental income would be taxable in SA. Depending on your child’s circumstances she would probably not be taxed on interest earned in SA.

Please note that for you to be considered non-tax resident in SA you would need to have broken tax residency with SA. If you have not broken tax residency, you may still be tax resident in SA and taxable in SA on worldwide income. It is therefore important to determine whether someone is tax resident or not as it will have big implications on tax payable in SA.