Answer:
Well, the first thing an individual (or couple) should realise is that while R2-million is certainly a lot of money, it could not be reasonably expected to provide a R300 000 per year standard of living the rest of their life expectancy.

That level of income would be 15 percent of the initial portfolio, which is a little too high for a conservative retirement investment to maintain. A couple in their 60s should plan on drawing on their portfolio for at least 20 more years and possibly even 30 years. People who manage to reach age 60 are living longer and 20 to 30 years is a long time to stretch the retirement nest egg.

So how much money should you expect to take out of a R2-million portfolio each year with reasonable assurance that you won't run out of money before you run out of time?

The answer depends on how you invest the money and what your retirement income needs will be. Fortunately, it is often possible to live comfortably on 50 percent of your last work-year's income because a lot of expenses disappear.

Diversify your investment

Then, assuming you're going to increase your withdrawals to keep up with inflation — and you should, otherwise your standard of living will decline — you will most probably need to count on a 12 percent return on investment and an inflation-adjusted withdrawal rate of around 7.5 percent.

This means that your first retirement-year withdrawal should be 7.5 percent of your portfolio's value — R150 000 in this case — and that amount would be increased by the inflation rate each year. This way, you'll maintain the purchasing power of your withdrawals and the portfolio will support you for approximately 21 years.

Investing in a combination of dividend-paying shares, bonds, property trusts and money market funds would allow for the possibility of income growth, assuming you select a well-considered portfolio. The stock portion yields the possibility of rising share prices, which means that your original nest egg may actually grow over the first five to 10 years. While this proposition is attractive, it is still considered wise to invest in a diversified portfolio.

How much will you need?

So what should you do? Carefully figure out how much income you'll actually need once you retire. In all likelihood, the amount will be 50 percent to 80 percent of your current salary.

If you figure on a 12 percent portfolio return each year but expect to draw an inflation adjusted 12 percent income — starting at R240 000 per year — the money will run out in approximately nine years. Alternatively, if you could live on R120 000 per year, or six percent drawings, the money will last for around 24 years.

So the rule of thumb is: plan to draw a smaller percentage of the total capital each year than the expected annual return on investment. The greater the difference between these two percentages, the longer your capital will last.