Two advisors answer this reader’s question.
I am a 61-year-old doctor working in a state hospital. I have reached retirement age and am considering retiring from the Government Employees Pension Fund (GEPF). My gratuity is R3.2 million and a monthly pension of R70 000 for life.
How should I invest the R3.2 million?
Dear reader,
There are various investment products and funds to select from, and without a more comprehensive understanding of your objectives, your risk tolerance and your financial circumstances, it is difficult to provide specific advice.
That being said, I would like to highlight three investment options that are worth considering.
Offshore investment
Investing in assets outside of South Africa is a great approach to diversifying your wealth. It also helps protect your financial position should South Africa’s economy deteriorate. Your monthly pension of R70 000 is guaranteed for life, but it is an income in rands, and so the purchasing power of this income is dependent on South Africa’s economy and the strength of the rand. Should South Africa find itself in an economic position similar to that of Turkey or Argentina, the monthly pension will diminish in value.
It is worth considering what proportion of your wealth is currently within the borders of South Africa and how much of it resides outside of South Africa. Ideally, one should not be overweight either.
There are various products available to invest offshore. Consider your objectives when deciding on the product — are you looking to preserve your capital and invest with minimal risk? Are you looking for a product that would be beneficial from an estate planning or tax planning perspective? Are you looking for a product where you have access to the funds at any time? These are some of the questions to consider when making your decision.
Guaranteed investment
Last year was not the best of years from an economic standpoint. We experienced high inflation, rising interest rates, and a declining market. Some investment managers are predicting a recession in 2023 while others believe the worst is over. What can be said with a higher level of certainty is that the next 12 months will probably see market volatility.
If your risk tolerance is low and if market declines impact your peace of mind, then an investment that guarantees your capital and offers you a guaranteed rate of return may be appropriate.
These products are usually tax efficient for high-income earners, such as yourself. The guaranteed rates on these products are currently quite attractive due to the present economic climate.
Buy-to-let property investment
You could consider purchasing a property and renting it out to generate income. The significant rise in interest rates over the last year has created a buyer’s market. An investment in buy-to-let property can provide a passive income and an asset that will grow in value over time. This can be a prudent investment, especially if the initial purchase price is at a discount.
Factors and risks to consider when making this investment are:
- Ad hoc maintenance costs, vacancies if you are unable to find a tenant, and non-paying or problematic tenants.
- An investment in property ties up your capital. Ensure that you have sufficient cash flow or an emergency fund in place.
- A buy-to-let property can yield higher returns (when combining the property’s capital growth and rental income) than an investment product, however, it comes with risk and removes liquidity from your portfolio.
There are countless investment options available on the market and finding a good investment solution is not the difficult part. The tricky part is to ensure that the investment solution implemented is aligned as best as possible with your objectives, risk tolerance and circumstances.