Forced to cut back

Madoda Milazi

Madoda Milazi

The question is no longer whether pensioners should reduce their lifestyle costs to preserve their investment capital - but by how much.

It is estimated that $14trillion (R135trillion) in market value was erased from world stock markets last year in the wake of the worst credit crisis since the Great Depression of the 1930s.

With share prices tumbling like Humpty Dumpty in every stock exchange, the reality for retirees was that their monthly income had shrunk.

High inflation added fat to the fire as the cost of living skyrocketed, further eroding the value of cash. Almost every investor lost money.

The only people who made money were those who had their savings in cash.

The severity of the market losses were reflected in the MSCI World Index, which lost more than 40percent last year.

The US market, as measured by the S&P 500, dropped by more than 38percent, which is its biggest yearly fall since 1937. The JSE All Share Index lost 27percent for the year, which is dramatic but not nearly as bad as the US and European markets.

Warren Ingram of Galileo Capital, said that recent research indicated that pensioners should not be drawing more than eight percent of their capital in a year to ensure that their investment survived inflation over their lifetime.

"If you have just retired at age 55 then you could draw a maximum of eight percent of your capital as income in a year. That means if you have R3million invested you can draw R240000 a year or R20000 a month. Bear in mind that you still have to pay tax," said Ingram.

He said if you had R3million invested and were currently drawing R30000 a month you were taking too much.

"Alternatively, a person aged 80 with R3million invested should draw approximately R12500 per month. If you use these guidelines you should be able to review your own position to see if you are still in a healthy financial position (when economic conditions improve)," said Ingram.