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SUB CATEGORIES General |  Savings & Investments |  Annuties | 

Erosion and requirements

03 February 2004 Angelo Coppola

PSG Fund management fund manager Mark Seymour puts an interesting perspective on capital erosion and monthly income requirements.

The average annual return on the ALSI since 1960 has been 12.48%, excluding a dividend yield of 4.73%. In the last 8 years, however, the average annual total return has dropped to 10.1%.

From an investment perspective, if you had R1m and you had an income requirement of R10 000 p/m (in an inflationary environment of 7.7% the average for the last 8 years), your capital would last 9 years and 3 months.

To address this problem, one would either have to increase one's capital base, decrease one's monthly requirement or increase one's annual rate of capital growth.

To put this into perspective (assuming an inflation rate of 6%), to maintain an income of R10000p/m with a growing capital base of 10.1% per annum, one's capital base would have to be R2.9m in order not to incur capital erosion.

The other two scenarios would be to decrease one's monthly income requirement to R3450 or to increase ones rate of capital growth to 19.6%.

To highlight the extreme difficulty of this situation, only seven unit trusts delivered this type of return... all of which are resource funds, which can be considered to be some of the highest risk funds to be in.

Taking a more conservative view, if one received the returns of the mean for the Domestic Asset Allocation Medium Equity sector (11.73%) over the last eight years, the capital base one would have required for a monthly income of R10000, would have been R2.2m.

All this points to the need for having your assets appropriately managed, so that the generated returns remain above average, and consistently beat their benchmarks.

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