WHAT INCOME WILL A MILLION RAND PENSION BUY YOU?

Are you avoiding talking about retirement? If you saw how little a million does for you, would this motivate you?

Yes, we’re all in the same boat. Retirement is creeping closer and closer, and you’re already struggling to make ends meet right now. The big question is, “Where are you going to find the extra money to save?”
If you think about it – if you’re struggling now, then how much more will you struggle in retirement? Ask the gentleman below.

Broke Pensioner

Now I don’t want to get caught up in discussing retirement, I simply want to answer a question I get asked all the time.
The question is, “How much do I need to retire on comfortably? R1 million, R3 million, R5 million…?”

So I decided to show you what a million Rand pension would do if you were retiring today.
You’re about to meet three gentlemen on the brink of retirement:

  • Herman who is retiring at 65 only because he’s reached retirement age
  • John who is retiring at 60, and
  • Paul who is calling it quits at 55 because he wants to.

The first thing I usually do when approached by someone about to retire, is shop around for a conventional life annuity. So let me first explain this.

What is a conventional life annuity?

A conventional life annuity is a contract between you and the life insurance company. You hand over your pension fund to them – forever. They, in return, pay you forever.

Once you sign the contract you never get your million Rand back, no matter how much you beg and plead. Die tomorrow, and your million Rand is history (There are options for leaving dependants with income, but this article assumes none of that).
You in return, are guaranteed to receive an income for the rest of your natural life on earth.
Their risk is guaranteeing you that income for life. Your risk is dying earlier than expected and them getting to keep your million.

They can make this promise because they can predict how long you will live based on your current age.

So this is what I told the life insurance company

  • I have a million Rand pension to invest
  • That it must pay a monthly income at the end of each month
  • That whatever that income is, it must increase with 10% every year

So what kind of proposal did they come back with? Let’s find out shall we?

Herman gets to retire at 65 on R3, 601 a month

Click on the image below to enlarge the actual quote.

Herman retiring at 65

John retires at 60 on R2, 787 per month

Click on the image below to enlarge the actual quote.

John retiring at 60

Paul survives at 55 on R2, 373 per month

Click on the image below to enlarge the actual quote.

Paul retiring at 55

What conclusion are we to draw from this?

A million Rand pension is nowhere near enough to retire on nowadays. A person with a million Rand is faced with two options:

  • Retire later or
  • Save more

Problem is; what if the option of retiring later isn’t an option?

Join the discussion. Leave a comment below with your thoughts on retirement.

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7 thoughts on “WHAT INCOME WILL A MILLION RAND PENSION BUY YOU?

  1. Many people while working are mislead by various other people who try and tell other people that are working that they will need X amount to comfortably retire on, my thoughts differ from these so called brokers, the more that the broker sells the bigger his or her commission will be. I say that it will be better for a person to put their money into something else that will give them better benefits, in other words not to have a lump sum of money in the bank or some retirement fund, rather buy property and rent it out and live from them, or buy machines and rent them out, or buy into another business that you can become a silent partner in, there are many options open for people that just have to use their brains and do it.

    • Hi Simon,

      I agree wholeheartedly with you about recurring streams of income. Although I wouldn’t suggest doing this at retirement or with your retirement money. Start out while you’re still working so you have time to learn from – and recover from – your mistakes.
      Quite honestly, the idea of retiring at 65 is antiquated. People are living longer and many will spend as many years in retirement as what they worked. You need to be re-skilling yourself so as to take up a second career once you formally retire. Of course this all backfires if you don’t have good health.

      The problem comes in when you’re a member of a provident or pension fund.
      At retirement there is only so much that you can withdraw in cash without paying any tax. Laws are being passed as we speak, which will prevent you from withdrawing more than one third of your provident fund in future.The rest must then be invested in products like the one described in the article.
      For the vast majority of people with smallish pensions, this is actually the safest option for them. I’ve seen so many who’ve withdrawn large amounts in cash, and who after 3 or 4 years, have nothing left to show for it.
      Consider the example used in the article…if you had a million rand in cash, would you be willing to live on those small amounts – or would you prefer withdrawing double that? Many would take double or even triple that if it was left up to them, and let the future worry about itself.

    • Hello Carol,

      An excellent question!
      I’ll post an article dealing with the same situation from a women’s perspective next week.

  2. I am a 53y old male.
    My wife is 48 years.
    I have been diagnosed with Parkinsons disease in 2004 and had a successful DBS implant in 2013; my wife is of good health.

    I will go on pension end November 2015. I need to buy an annuity income for myself and also for my wife if she survives me.

    I want a monthly income of R15500 for life; and a surviving spouse income for my wife of R11600 per month.

    Will I be able to buy this for R1.8 million?
    And will R1.8 million be enough to buy this annuity with growth for inflation, or will it buy a flat annuity only?

  3. When you are on a PENSION scheme and you retire after 55years of age can you withdraw all your money?

    • Hi Timmy,

      No. Once you retire from a pension fund you are entitled to one-third in cash (of which R500, 000 is paid to you tax-free) and the remaining two-thirds is used to purchase a compulsory annuity income (also taxable like your monthly salary).