When you retire with a Living Annuity, your money stays invested—so market movements directly affect how long your income will last. If markets go up, your capital grows.
If markets fall and you keep drawing the same income, your savings can shrink faster than planned.
Here’s how volatility works, why it matters, and what you can do about it.
What Happens During Market Volatility?
Volatility refers to how much investment prices rise or fall in short periods. When markets drop, your Living Annuity capital takes a knock. But if you’re still withdrawing income at the same rate, you’re pulling from a smaller pool of money—which could speed up how fast your savings run out.
This is especially risky if your drawdown rate is already high or if you’re early in retirement and your portfolio hasn’t had time to recover from losses.
Why This Affects Your Income
A Living Annuity gives you the freedom to draw income (between 2.5% and 17.5%) and choose your investment mix. But if your capital shrinks and your drawdown doesn’t adjust, the pressure on your savings builds over time.
Equities, for example, offer the best long-term growth potential, but they also tend to swing the most. If your annuity is invested mainly in shares, your income may fluctuate more during rough patches.
How to Manage the Risk
- Lower Drawdown When Markets Are Down
If the market takes a dip, consider drawing less to give your capital a chance to recover. You can increase your income again later if needed. - Diversify Your Investments
A mix of shares, bonds, cash and offshore exposure can help smooth out volatility. Bonds and cash add stability. Offshore assets reduce reliance on the local economy and currency. - Rebalance If Needed
If your asset allocation no longer suits your risk profile or the market climate, you can shift to something more conservative. This helps preserve capital without exiting the market completely.
Use the Golden Rule to Test Your Plan
Here’s a helpful formula to check if your Living Annuity is sustainable:
Investment return ≥ Drawdown + Fees + Inflation
For example, if you’re drawing 4%, paying 2% in fees, and inflation is 6%, you need to earn at least 12% per year to preserve your capital. If you fall short, you’re slowly eating into your savings.
Why Fees Matter More Than You Think
Small differences in fees have a big impact over time. Paying 3% instead of 1.5% may not sound like much, but over decades, it could reduce your total returns by hundreds of thousands of rands. Always check your Effective Annual Cost (EAC) to understand what you’re really paying.
Inflation Eats Away at Your Buying Power
If inflation is 6%, R120,000 in income this year will only be worth R113,000 next year in real terms. Unless your investments grow faster than inflation, your income loses value—even if the number stays the same. Increasing your drawdown to keep up can make your capital run out faster.
Don’t Go Too Conservative Too Early
Cash and bonds feel safe, but often don’t beat inflation. Retirement may last 30+ years, which means you’ll likely need some growth in your portfolio. Equities can help—but finding the right balance is key.
Focus on Net Returns, Not Just Growth
High fund returns mean nothing if fees and inflation eat most of it. What matters is what you actually keep. A fund returning 12% sounds great—but if 6% goes to inflation and 2% to fees, you’re left with only 4% real growth. That may not cover your drawdown.
Review Your Drawdown Each Year
A 4% drawdown is generally considered sustainable, but it’s not a rule. Your drawdown should reflect your needs, the market climate and how your investments are performing. Lower is better if you want your capital to last longer.
Try Our Living Annuity Calculator
Curious whether your drawdown is on track? Use our Living Annuity Calculator to see how fees, inflation and returns affect your income and how long your savings might last.
In Summary
Market volatility is normal, but without a plan, it can shorten the life of your Living Annuity. By managing your drawdown, diversifying your investments and keeping costs low, you give your retirement income a better chance of lasting.
Need help creating a sustainable strategy? Speak to an Investonline adviser and get a free report comparing your options and showing how long your money could last under different scenarios.
