How to get most from pension

STRATEGY: HOW CAN I DRAW A R150K MONTHLY INCOME FROM A R42M PORTFOLIO?

- Matthew Matthee

David, aged 65, has accumulated R30 million in retirement funds and R12 million in discretionary savings (unit trusts, shares), totalling R42 million. He requires R150,000 after tax per month to maintain his lifestyle in retirement. His goal is to minimise the tax impact of his withdrawals while ensuring the long-term sustainability of his portfolio.

The question: To minimise tax in retirement, should David draw funds from his discretionary savings, retirement funds, or a combination of both?

Understanding the tax impact of withdrawals:

Retirement annuities (RAs) and living annuities (LAs) are tax-deferred vehicles - meaning David saved tax while contributing, but withdrawals will be taxed at his marginal tax rate (18%-45%).

The assumption is that his taxable income in retirement will be lower than during his working years, placing him in a lower tax bracket when he withdraws.

What if David withdraws 100% of his income from his living annuity?

Assuming David converts his RA into a living annuity and takes his full income requirement from this pot:

To receive R150,000 after tax, he would need to draw R243,000 per month.

That means R93,000 in tax every month - a staggering R1.1 million in tax per year.

His annual withdrawal rate (total withdrawals as a percent of the entire portfolio) would be 6.9%, which research shows has a 65% chance of depleting the fund within 30 years.