Cornerstone — Edition 07
Making Your Money Last As Long As You Do
Saving for retirement is a problem most people understand. Converting those savings into an income that lasts 25 to 30 years — without running out, without unnecessary tax, and without sacrificing quality of life — is a different and considerably harder problem.
It is also the problem that matters most from the day you retire until the last day of your life.
This edition is for those who have retired or are within reach of it. The accumulation phase is largely behind you. The distribution phase — drawing from what you’ve built, sustainably, for decades — is what we address here.
Your drawdown rate is the percentage of your capital you withdraw each year to fund your living expenses. If you have R5 million invested and you withdraw R250,000 per year, your drawdown rate is 5%.
Research consistently shows that a drawdown rate of 4% to 4.5% — adjusted annually for inflation — gives a portfolio a high probability of lasting 25 to 30 years across a wide range of market scenarios. This is known as the safe withdrawal rate, and while no withdrawal rate is guaranteed, the evidence for the 4% figure is substantial and consistent.
4–4.5%
Safe zone
High probability of capital lasting 25–30 years across most market environments.
4.5–7%
Caution zone
Meaningful risk of outliving your capital. Late-retirement shortfall becomes a real possibility.
Above 7%
Danger zone
Capital depletion in your late 70s or 80s becomes near-certain in most market environments over 25 years.
If your required income implies a drawdown rate above 5%, you either need more capital, a lower income requirement, or a product that guarantees income regardless of capital depletion — which brings us to the annuity question.
These bands are a general guide, not a hard-and-fast rule. They describe what tends to be true across a wide range of retirees and market conditions — they are not a verdict on any individual's plan. A client's specific portfolio returns, health, time horizon, and other resources can justify a materially different rate. We have a client in her mid-70s currently drawing at 10% — well outside the danger zone by these general figures — and we are entirely comfortable with that, given her portfolio's performance and her specific circumstances. The bands are a starting point for a conversation with your adviser, not a ceiling or a floor.
The right drawdown rate for you depends on your specific portfolio, your other income sources, and how your capital is invested — it is not a number you should settle on alone. Speak to an adviser about what your drawdown rate should look like, and how to structure your investments to maximise long-term returns while still holding a prudent level of cash on hand — enough to see you through an extended market downturn, of the kind seen in 2007/8, without being forced to sell growth assets at a loss.
Most South Africans who retire with significant retirement savings choose a living annuity. It offers flexibility and legacy, but exposes you to longevity risk and investment risk — a trade-off worth understanding properly before you choose between the two.
Living annuity
Your retirement savings move into an investment account that stays invested — it remains your money. Each year you choose a drawdown rate, by law between 2.5% and 17.5%, paid out to you monthly. The rest stays invested and continues to grow or shrink with the market.
Exposes you to longevity risk and investment risk. If you draw too much, or markets underperform, the capital can run out.
Life annuity
You hand a lump sum to an insurer in exchange for a guaranteed income for life. The insurer calculates your monthly payment based on your age, sex, and life expectancy, and pays it for as long as you live — five years or forty.
Irreversible. No flexibility. Leaves nothing to your estate, unless you pay extra for a guarantee period or spouse’s benefit — which reduces the monthly amount.
A hybrid approach — converting a portion of capital to a life annuity for a guaranteed income floor, and holding the remainder in a living annuity for flexibility and growth — is increasingly recognised as appropriate for many retirees. The right balance depends on your health, your risk tolerance, your other income sources, and your estate intentions. It is a decision worth revisiting every few years as circumstances change — not one made at retirement and never reviewed.
Siya retires with R15 million. At a 4% drawdown rate — the safe zone — that’s R600,000 a year, R50,000 a month, comfortably covering her living costs with room to spare. She has no reason to give up flexibility or legacy for a guarantee she doesn’t need, so she keeps her full portfolio in a living annuity.
Mike retires with R5 million. He needs R25,000 a month to cover his expenses — R300,000 a year, a 6% drawdown rate. That puts him in the caution zone, with a real risk of depleting his capital in his late 70s or 80s. Rather than draw at a rate that raises that risk, Mike uses a portion of his R5 million to buy a life annuity guaranteeing part of his R25,000 need for life. The remainder stays in a living annuity, drawn at a safer rate, covering the rest.
Same income goal, same starting products — but the size of the pot behind it changes what’s prudent. Mike’s essential expenses are now guaranteed regardless of markets, and the capital he still manages carries a smaller, more sustainable draw. This is a decision worth working through with an adviser, not settling on capital size alone.
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Assumes a 9% average annual investment return and 5% annual inflation on your withdrawal, projected forward year by year. This is a general planning illustration, not a guarantee — actual markets and inflation vary. Speak to an adviser to stress-test these assumptions against your specific circumstances.
A retiree receiving R30,000 per month today, with no inflation adjustment, will receive the equivalent of far less in real purchasing power within a decade. This is the central challenge of a fixed or insufficiently escalated income in retirement.
Today
R30,000
Monthly income
In 10 years
R16,500
Real purchasing power at 6% inflation
In 20 years
R9,300
Real purchasing power at 6% inflation
Essential costs — food, fuel, utilities, and especially healthcare — typically rise in price faster than the average cost of living. The inflation figure you hear quoted each month is a blend across everything people buy; the specific things retirees spend most of their money on tend to go up faster than that blended average. A retirement income that covers your needs comfortably at 65 may be materially insufficient at 75, not because your lifestyle has changed, but because prices have.
Review your drawdown escalation annually. Ensure your portfolio is invested with sufficient growth assets — equities — to generate returns that outpace inflation over the long term. A retirement portfolio of 100% cash or bonds does not do this.
A South African who reaches retirement in reasonable health at age 65 can realistically expect to live to 82 to 88, with a meaningful probability of reaching 90 or beyond. A 30-year retirement is not a pessimistic scenario — it is a realistic planning horizon for a healthy 60-year-old today.
Plan to live to at least 95. Retire at 60, and that’s a 35-year retirement. Retire at 50, and that’s 45 years. If you live for less, you leave a larger estate. If you live that long, you don’t run out. The asymmetry of outcomes strongly favours the more conservative planning horizon.
A plan built for 20 years of retirement — which is what many people implicitly plan for — may fail in the final decade when it matters most.
Medical aid premiums for retired couples on comprehensive plans currently range from R6,000 to R12,000 per month. At a medical inflation rate of 8–10% per year, a couple paying R8,000 per month at retirement will be paying approximately R17,000 per month in 10 years and R38,000 per month in 20 years — in nominal terms, before any increase in usage.
Most retirement income projections do not adequately account for this escalation. Healthcare should be budgeted as a separate, specifically inflating line item — not folded into a general living cost estimate that assumes uniform inflation.
A frail care facility in South Africa currently costs R20,000 to R60,000 per month. This is not covered by standard medical aid. It is a specific risk that requires either dedicated savings, specialist cover, or explicit reliance on family — each of which is a valid plan, as long as it is a deliberate plan rather than an assumption.
Retirement is not the end of estate planning — it is when estate planning matters most. Several things require active maintenance through retirement.
Beneficiary nominations on your living annuity and any remaining retirement funds should be reviewed annually. A living annuity pays out to your nominated beneficiaries on death — outside your Will, bypassing your estate and estate duty. Keeping these nominations current is a routine task that is frequently neglected.
Your Will should be reviewed whenever your circumstances change — the death of a spouse, a change in the family structure, a significant shift in your asset base.
Capital gains tax on a large discretionary portfolio is material and can be managed with appropriate structuring. In simple terms, when you sell an investment for more than you paid for it, only part of that profit is added to your taxable income — currently 40% of it, above an annual tax-free amount. The rest of the profit isn’t taxed at all. Ensure your estate is structured to minimise this where possible.
The one question to sit with
At your current drawdown rate, and with your current investment allocation, what is the probability that your money lasts as long as you do? If you don’t know the answer, that is the first conversation to have.
Worth reading
How Much Can I Spend in Retirement?
The most rigorous and readable treatment of sustainable withdrawal rates available to non-specialist readers. Pfau builds on the original “4% rule,” a 1994 finding by planner, William Bengen, that even the worst 30-year stretch in nearly a century of U.S. market history could sustain a 4% initial withdrawal, adjusted annually for inflation. Pfau’s contribution is questioning how far that single historical worst case should really be stretched to cover every retiree’s very different circumstances today.