A Fin24 reader, writing on behalf of her grandmother, wants to know which short-term investment vehicle would be best to generate enough profit to live on, while preserving her capital investment. She writes:
My grandmother recently received a third of her retirement money as a lump sum payment (around R200,000) and she wants advice on what to do next. She will receive the remainder of her pension as a monthly salary until her death. She wants to invest in an investment vehicle that will allow her to live off the profit, while preserving the initial capital.
The duration of the investment is expected to be short term as it is only 65 years old. Any advice on what to invest in would be appreciated as she currently has the money in a bank account with 32 days notice.
Hester van der Merwe, wealth manager for Ultima Financial Plannerand Financial Planner of the Year 2020 respond :
Thank you for your question. The final answer will depend on your grandmother’s personal situation. For example, does she have an emergency fund, how is her health, and will her fixed pension increase each year?
The answers to these questions will dictate whether she can afford to lock in the capital for a period or whether she needs to keep some of it in an account where she will have immediate access to it. Your grandmother should also take into account that we are currently in a low interest rate cycle. This means that she cannot earn as much in a bank account as she might have expected. However, some term deposits may offer a rate that will be acceptable to him. It is important to determine whether a fixed deposit will earn interest on a monthly basis or only at maturity.
Confirm the monthly interest payment beforehand and do not invest only with a stated interest rate, as their understanding of the interest calculation may differ from the actual interest offered by the bank.
Your grandma may also consider investing the amount in an RSA retail bond. Investors in Fixed Rate Retail Savings Bonds aged 60 or over may elect to receive interest on a monthly basis.
She must make sure to select this option beforehand, because it cannot be changed once the investment is finalized. As with term deposits, the interest rate will depend on the term chosen.
As she is only 65, she may have to depend on these funds for several years. Ideally, she would need some capital growth on the amount to ensure that inflation does not erode the purchasing power of her capital.
This will, however, involve a riskier investment as the value of the capital may fluctuate in the short term and earning income from the fund may result in a loss of capital during these periods. It is strongly recommended that you seek the advice of a Certified Financial Planner® if you decide to go this route.
*Questions may be edited for brevity and clarity.